The fundamental identity of national accounting states that the same value of total economic activity is obtained whether activity is measured by the production of final goods and services, the amount of goods generated by the economic activity, or the expenditure on final goods and services.

Y = C + I + G + NX

According to the income-expenditure identity, total income or product or output, Y, equals the sum of the four types of expenditure: consumption, C, investment, I, government purchases, G, and net exports, NX.

S_pvt = (Y + NFP – T + TR + INT) – C

Private saving equals private disposable income less consumption, C. Private sector disposable income equals gross domestic product, Y, plus net factor payments from abroad, NFP, plus transfers, TR, and interest, INT, received from the government, less taxes paid, T.

S_govt = (T – TR – INT) – G

Government savings equals government receipts from taxes, T, less outlays for transfers, TR, interest on the national debt, INT, and government purchases, G. Government saving is the same as government budget surplus and is the negative of the government budget deficit.

S = S_pvt + S_govt = Y + NFP – C – G

National saving, S, is the sum of private saving and government saving. Equivalently, national saving equals gross domestic product, Y, plus net factor payments from abroad, NFP, less consumption, C, and government purchases, G.

S = I + CA

National saving, S, has two uses: to finance investment, I, and to lend to foreigners (or to acquire foreign assets) an amount that equals the current account balance, CA. The current account balance equals the increase in net foreign assets.

S_pvt = I + (- S_govt) + CA

According to the uses-of-savings identity, private saving is used to finance investment spending, I, to provide the government with the funds it needs to cover its budget deficit, - S_govt, and to lend to foreigners ( or to acquire foreign assets) an amount that equals the current account balance, CA.

r = i – p^e

The expected real interest rate, r, equals the nominal interest rate, i, minus expected inflation p^e. (should have been pie)

From:

Dornbusch, R., Fisher, S. and C. Kearney (1996)
Macroeconomics. Sydney: The MC-Graw-Hill
companies, Inc.

“The whole aim of practical politics,” said H. L. Mencken, “is to keep the populace in a continual state of alarm (and hence clamorous to be led to safety) by menacing them with an endless series of hobgoblins, all of them imaginary.”

As usual, Mencken was understating things. Had he lived in present-day Canada, he would have seen the hobgoblins marching, not single file, but in mobs. Hollowing out. Dutch disease. “Dead money.” All supposed menaces to the populace — among a long list — all provably imaginary (see Coyne, A., passim).

Indeed, it’s hard out there for a hobgoblin. While no one would mistake these for boom times, the reality is that the Canadian economy remains in relatively good shape. Unemployment is at 7.3%: a percentage point higher than it was at its pre-recession low, but lower than at almost any other time in the last 40 years. (And headed lower: the TD Bank predicts by this time next year it will be below 7%, on its way to 6.)

[np-related]

Poverty, even when measured against a moving target like Statistics Canada’s Low Income Cut Off, is at its lowest level in at least 40 years, perhaps ever: 9% as of 2010, versus 15% just a few years ago. Inflation is low, growth is steady, if unspectacular. Median incomes have resumed rising, after a brief interruption, having increased by 20% after inflation over the previous two decades.

So if you are an opposition leader, and you wish to convince the populace we are in the midst of, as Tom Mulcair told his caucus yesterday, “an unprecedented economic downturn” (unhelpfully, the Liberals were at the same time claiming credit for “the underlying economic strength of the country”), what do you do? You send out for another hobgoblin. Ladies and gentlemen, allow me to introduce: the Record Trade Deficit!

A non-issue until about a week ago, the NDP has suddenly seized upon the trade deficit as its primary index of the general unprecedentedness of things

A non-issue until about a week ago, the NDP has suddenly seized upon the trade deficit as its primary index of the general unprecedentedness of things. “Canada’s growing trade deficit is ringing alarm bells,” claims a party press release, quoting no less an authority than NDP trade critic Don Davies. “In July, Canada ran the worst merchandise trade deficit in history,” quoth Davies, “and it’s not an isolated event.”

Indeed. “Mr. Speaker, when the Conservatives took office, Canada had a $26-billion trade surplus,” Mulcair thundered Tuesday, in one of several interventions on the subject. “Today, Canada has a $50-billion trade deficit, which is an all-time high. How can the Prime Minister explain this failure to Canadians?”

The notion that trade deficits are some sort of economic blight, or that policy should aim at earning a trade surplus (invariably described in the press as “healthy”) is perhaps the oldest of all economic fallacies. It was indeed the point of Adam Smith’s work to suggest “the wealth of nations” lay in the welfare of their people, and that the purpose of trade was to raise their living standards, rather than to earn gold for the king. Yet two centuries later, the same mercantilist superstitions — exports good, imports bad — appear to inform the thinking of our leading opposition party.

Exactly why there should be any necessary relation between the amount of goods and services a country sells to others and the amount it buys is never explained, so self-evident is it taken to be. Often the same principle is invoked, not only with regard to trade generally, but to specific countries or commodities: thus, “we continue to suffer a deficit with Japan in autos.”

POP QUIZ: does Ontario have a trade deficit with Alberta? How much? Don’t know? If it doesn’t matter to you when it comes to trade between provinces, what makes it a subject of such all-consuming importance between nations? Right: because those other countries are populated by foreigners. And what do those foreigners get in return for their trade surplus with Canada? They get lots of lovely, multi-coloured Canadian dollars, good for spending … in Canada. They can buy more Canadian goods and services, or they can invest in Canadian businesses.

The trade deficit, in other words, is only one part of our overall balance of payments. And the balance of payments must balance: whatever deficit we have on trade (technically, the current account, a broader measure that includes, for example, payments on investments) is necessarily offset by an equal and opposite surplus on the capital account. That’s not an accident, or a wish. It’s an accounting identity.

Or turn it around. Suppose Canada were the hottest investment destination on earth. Foreigners are lining up to put their money down. But they can only lend us the Canadian dollars they earn by trading with us. So one way or another a current account deficit must result. The balance of payments must balance.

If the causes of a trade deficit are so uncertain, so is its meaning. It can suggest an underlying problem: if, for example, those foreign funds were being borrowed, not to fuel productive investment but to feed current consumption, as is typically the case with government deficits. But there’s no particular significance to a trade deficit in itself.

Indeed, it can be as much a sign of strength as weakness. A country whose economy is growing relatively slowly, compared to its trading partners, will buy rather less from them, and sell rather more. Its trade deficit will accordingly shrink. Conversely, a country that is growing quicker than its partners will experience an increase in its trade deficit. POP QUIZ: Which country would you rather live in?

As usual, Mencken was understating things. Had he lived in present-day Canada, he would have seen the hobgoblins marching, not single file, but in mobs. Hollowing out. Dutch disease. “Dead money.” All supposed menaces to the populace — among a long list — all provably imaginary (see Coyne, A., passim).

Indeed, it’s hard out there for a hobgoblin. While no one would mistake these for boom times, the reality is that the Canadian economy remains in relatively good shape. Unemployment is at 7.3 per cent: a percentage point higher than it was at its pre-recession low, but lower than at almost any other time in the last 40 years. (And headed lower: the TD Bank predicts by this time next year it will be below 7 per cent, on its way to 6.)

Poverty, even when measured against a moving target like Statistics Canada’s Low Income Cut Off, is at its lowest level in at least 40 years, perhaps ever: 9 per cent as of 2010, versus 15 per cent just a few years ago. Inflation is low, growth is steady, if unspectacular. Median incomes have resumed rising, after a brief interruption, having increased by 20 per cent after inflation over the previous two decades.

So if you are an opposition leader, and you wish to convince the populace we are in the midst of, as Tom Mulcair told his caucus yesterday, “an unprecedented economic downturn” (unhelpfully, the Liberals were at the same time claiming credit for “the underlying economic strength of the country”), what do you do? You send out for another hobgoblin. Ladies and gentlemen, allow me to introduce: the Record Trade Deficit!

A non-issue until about a week ago, the NDP has suddenly seized upon the trade deficit as its primary index of the general unprecedentedness of things. “Canada’s growing trade deficit is ringing alarm bells,” claims a party press release, quoting no less an authority than NDP trade critic Don Davies. “In July, Canada ran the worst merchandise trade deficit in history,” quoth Davies, “and it’s not an isolated event.”

Indeed. “Mr. Speaker, when the Conservatives took office, Canada had a $26-billion trade surplus,” Mulcair thundered Tuesday, in one of several interventions on the subject. “Today, Canada has a $50-billion trade deficit, which is an all-time high. How can the Prime Minister explain this failure to Canadians?”

The notion that trade deficits are some sort of economic blight, or that policy should aim at earning a trade surplus (invariably described in the press as “healthy”) is perhaps the oldest of all economic fallacies. It was indeed the point of Adam Smith’s work to suggest “the wealth of nations” lay in the welfare of their people, and that the purpose of trade was to raise their living standards, rather than to earn gold for the king. Yet two centuries later, the same mercantilist superstitions — exports good, imports bad — appear to inform the thinking of our leading opposition party.

Exactly why there should be any necessary relation between the amount of goods and services a country sells to others and the amount it buys is never explained, so self-evident is it taken to be. Often the same principle is invoked, not only with regard to trade generally, but to specific countries or commodities: thus, “we continue to suffer a deficit with Japan in autos.”

Pop quiz: does Ontario have a trade deficit with Alberta? How much? Don’t know? If it doesn’t matter to you when it comes to trade between provinces, what makes it a subject of such all-consuming importance between nations? Right: because those other countries are populated by foreigners. And what do those foreigners get in return for their trade surplus with Canada? They get lots of lovely, multi-coloured Canadian dollars, good for spending … in Canada. They can buy more Canadian goods and services, or they can invest in Canadian businesses.

The trade deficit, in other words, is only one part of our overall balance of payments. And the balance of payments must balance: whatever deficit we have on trade (technically, the current account, a broader measure that includes, for example, payments on investments) is necessarily offset by an equal and opposite surplus on the capital account. That’s not an accident, or a wish. It’s an accounting identity.

Or turn it around. Suppose Canada were the hottest investment destination on Earth. Foreigners are lining up to put their money down. But they can only lend us the Canadian dollars they earn by trading with us. So one way or another a current account deficit must result. The balance of payments must balance.

If the causes of a trade deficit are so uncertain, so is its meaning. It can suggest an underlying problem: if, for example, those foreign funds were being borrowed, not to fuel productive investment but to feed current consumption, as is typically the case with government deficits. But there’s no particular significance to a trade deficit in itself.

Indeed, it can be as much a sign of strength as weakness. A country whose economy is growing relatively slowly, compared to its trading partners, will buy rather less from them, and sell rather more. Its trade deficit will accordingly shrink. Conversely, a country that is growing quicker than its partners will experience an increase in its trade deficit.

Pop quiz: Which country would you rather live in?

Above:  An auto parts exhibition in Beijing in April. On Monday, US President Barack Obama announced the United States would go to the World Trade Organization to file a lawsuit alleging that China provides subsidies to companies that make automobiles and auto parts, thus harming their US competitors. [Photo/China Daily]

By Ding Qingfen and Li Jiabao (China Daily)

On Monday, US President Barack Obama announced the United States would go to the World Trade Organization to file a lawsuit alleging that China provides subsidies to companies that make automobiles and auto parts, thus harming their US competitors.

In response, the Ministry of Commerce said on Wednesday: “The US’ decision was made out of political considerations. A presidential election is now going on in the US and President Obama made the announcement in Ohio, which is a state where much automobile production takes place. China is firmly opposed to the US action.”

While uncertainties about Europe’s debt troubles linger and the US economic troubles wield a strong influence over the current presidential campaign, a new wave of trade protectionism is being directed against China.

China has repeatedly called on the US to abide by its commitment to fight trade protectionism and to ensure that international trade is conducted in an open and fair manner.

“From cases involving solar panels to rare earths and many other sorts of products, we have already seen that trade protectionism is being used more often against China, and this will probably continue for a couple more months,” said Zhang Xiangchen, director-general of the Ministry of Commerce’s department of policy research.

He said “the US and the (European Union) will be the most aggressive players in the game”, noting that their economies are plagued by either “high unemployment” or “huge debt burdens”.

In early September, the EU announced plans to start an anti-dumping investigation into exports of Chinese solar panels, which, last year, had a value of 21 billion euros ($27.5 billion). The probe came at the request of a group of 25 producers of solar equipment and is the biggest-ever anti-dumping claim to be submitted to the bloc. The EU countries are the chief destinations of Chinese exports, making it likely that the investigation will deal a devastating blow to Chinese solar companies if it results in the imposition of greater duties.

For more than a decade, China has been a target of trade disputes, a development that has largely resulted from the quickening pace of its exports. Since 2009, a wave of trade investigations into Chinese exports, led especially by the US, has threatened to drown Chinese manufacturers.

The conditions are even worse this time. “Europe’s debt troubles are spreading to more countries” at the same time that the “US presidential election campaign is drawing to a close and the world’s largest economy is struggling to recover”, said Tu Xinquan, deputy director of the China Institute for WTO Studies at the University of International Business and Economics in Beijing.

The first half of this year saw the start of 40 trade remedy investigations into Chinese exports, a number up by 38 percent year-on-year.

In one of the most significant of those cases, the US, the EU and Japan submitted a complaint about China to the World Trade Organization in March, accusing it of controlling exports of rare earths, elements that are widely used in the production of smartphones, computers and other sophisticated hardware.

Previously this year, Obama had announced plans to establish an enforcement unit that would work across agencies to crack down on unfair trade practices conducted by US trade partners. Many saw that decision as being the president’s attempt, as he tries to get re-elected, to show voters that he is getting tough on China.

As the presidential election enters its final months, and both major party candidates work ever harder to win votes, China is only likely to become the target of more blame.

A recent survey suggested that 62 percent of US citizens are in favor of getting tough on China, want to “use every possible means to stop (its) unfair trade practices” and are concerned that too many jobs are being “shipped” overseas.

The opinion article entitled “Importing Jobs From China,” said that it is “a good moment to look at the actual evidence and see how imports from China often create American jobs.”

The article was published amid reports that the Obama Administration plans to file new complaints with the World Trade Organization against Chinese autos and auto parts.

Chinese imports in apparel and toys alone supported a total of 576,000 jobs in the United States in 2010, the article said, citing a new report from the Heritage Foundation.

And a 2010 paper from the Asian Development Bank Institute found that although each iPhone 3G exported from China to the United States with a declared value of 178.96 U.S. dollars, only 6.50 dollars of that value was clearly attributable to China, where the phones underwent final assembly, it said.

The article gave further evidence to expand the point.

“Up to 55 cents of every 1 dollar spent on a product with a ‘Made in China’ label actually goes to Americans who design the products; manufacture components that are shipped to China for final assembly; transport the goods; market and retail them; finance their production and trade, and so on,” it quoted economists at the Federal Reserve Bank of San Francisco as saying in a study.

Refuting the purported huge American job losses from trade — 2.7 million net jobs lost to Chinese imports between 2001 and 2011, the article said: “These calculations wrongly assume that a product not manufactured in China would automatically be made in America.”

“Yet manufacturing has often shifted to China not from the U.S. but from countries like South Korea or Japan from which America used to import,” it said.

The article admitted that the presidential election is “bringing out the worst in both candidates on trade.”

But what the country really needs, it said, is “a President willing to educate Americans about the benefits of trade – even with China.”

Capacity and production levels.

Firstly, is the common explanation true? Are we really exporting that much more stuff than we were three years ago. I’ve attached some graphs I pulled from government reports here and here. What you see is profits declining wildly in 2008 Q4, followed by a shrinking in capacity and production in 2009. This matches with my experience; the company I worked at in 2008 got very worried at the end of the year, and I was laid of in January of 2009. Then I was laid of from a few other companies through that year as I took jobs in other companies that eventually “hit the wall.” I would assume that the majority of the decline in capacity is due to a decline in employment; capacity is largely determined by machines and people: decrease one and capacity decreases. I don’t think as many business sold off their capital equipment during that period, unless they went out of business and had to liquidate. (Which did happen in some cases.) I think the companies where this happened were already struggling and the downturn sealed their fate, hence they didn’t have much capacity in early 2008 to lose in 2009.
To add my personal observations to the mix, I think that some people exited this specific labor market, and the failure of capacity and production to regain it’s previous high is a function of the difficulty in recruiting workers. The trend appears to be heading up. I think this is due to new machines and greater productivity, but I’m still tracking down the number for that. Manufacturing is also very capital intensive, which makes these graphs interesting to me. The lack of liquidity in the markets doesn’t seem to have stopped manufacturers from coming back. I suspect part of this is because they (smartly) didn’t liquidate their capital assets. However, as noted here, they are investing in new capital assets. That seems to suggest that they would grow more aggressively if they had the workers to do so. Based on the growth in profits, my assumption is they are pushing the available workforce to do more and spending the profits available from this increased productivity in new machines. Some of it may well be in automation, in order to reduce the volatility in their variable costs. I.e. trading volatile variable costs for less volatile fixed costs while the sun is shining. I expect this will reduce the overall risk profile and make credit more available, possibly leading to further competitive investments. I think some of this will pan out as R&D efforts, and some as capital investments. This could be just the recession that manufacturing needed to spur modernization of equipment and workforce. The downside is that I don’t see as much investment in workforce training, which is harder to track, but a common complaint.

I have been happily working my way through Fernand Braudel‘ s tangled, lumpy, unmade-bed of a book whose three volumes have the overall title Civilization and Capitalism: 15th-18th Century. About halfway into the second volume Braudel makes some observations about mercantilism, and they have given me furiously to think.

Every American boy or girl who paid even the slightest attention in school knows that mercantilism was a bad idea. It bled the colonies for the benefit of the homeland, and consequently the colonies revolted. Those who listened a little longer also know that the mercantilist striving for a “favorable” balance of trade meant exportation of goods and importation of precious metals, a policy that is ultimately self-defeating because, as Midas found out, gold and silver are not good to eat. Braudel knows all this, too.

As an example of mercantilist foolishness, he tells us that in 1703, toward the start of the War of the Spanish Succession, the English were advised to send “grain, manufactured products and other goods” from home to their troops fighting in the Low Countries. They could have bought these supplies easily and presumably more cheaply on the Continent, but the government was” obsessed by the fear of losing its metal reserves.” Any follower of Adam Smith or David Ricardo can see that this policy led England to waste real wealth (usable goods) and save nominal wealth (unusable metal).

In the world of theory, the mercantilist passion for a favorable balance of trade seems indefensible. It is surely more sensible to collect what you can use than to squirrel away what is of little or no use in bank vaults. But as Braudel reads the historical record of the actual world, he is forced to recognize that the mercantilist policy was in fact successful. “In any case,” he writes, “every time we have to deal with a comparatively advanced economy, its trade balance is in surplus as a general rule.” Flying in the face of classical economics, the more advanced economies exported usable goods and imported gold and silver.

The classical theory fails here (as elsewhere) because it is both ahistorical and asocial. It describes an instantaneous slice of a world without time; and it concerns things, like the GNP, not people, like you and me. Criticism of the English policy of 1703 silently assumes that purchasing war materiel overseas would have had no effect on English farms and factories. The assumption is that the goods purchased on the Continent would have been added to those produced at home, and that the English wealth would have risen accordingly. But in the real world, English farmers, deprived of part of their market, would have cut back production expenses (which is another name for employment) even if production stayed high for a time. And English manufacturers of soldier suits and the like would surely not have continued producing them if the government didn’t buy them. Their employment, too, would have fallen. These drops in employment would have meant a decline in the English standard of living. The mercantilist policy preserved that standard of living (such as it was); the classical theory would have reduced it.

Carlo M. Cipolla, in Before the Industrial Revolution (a marvelous book that covers roughly the same ground as Braudel in about one-tenth the space), has an excellently apposite quotation that dramatizes the failure of the classical theory. In 1675 one Alfonso Nunez de Castro wrote, “Let London manufacture those fabrics of hers to her heart’s content; Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocades; Italy and Flanders their linens, so long as our capital can enjoy them; the only thing it proves is that all countries train journeymen for Madrid and that Madrid is the queen of parliaments, for all the world serves her and she serves nobody.” As it turned out, for lack of trained journeymen Spain fell into a slough of stagnation it has yet to escape three centuries later.

In the infrequently noticed catch-all Chapter 23 of The General Theory of Employment,  Interest and Money, John Maynard Keynes includes some “Notes on Mercantilism … ” He observes that a favorable balance of trade, by bringing in gold and silver, increased a country’s money supply, which forced down the interest rate (Federal Reserve Board  please note), which stimulated investment.

Let’s carry the argument a step further. Investment is not stimulated rationally, that is – for its own sake. From the point of view of the investor, the purpose of investment is to produce goods that are in demand. From the point of view of the nation, the purpose of investment is to provide employment for its citizens, and to produce things that are wanted. Since employed citizens are able to make purchases create demand – these two purposes can work together, though they do not necessarily do so.

In the early modern world of the mercantilists, the interest rate was, as Keynes said, held down indirectly (and very possibly unintentionally) by fostering a favorable balance of trade. To have a favorable balance of trade, a country must export more goods than it imports. To export more goods, it must produce more goods. To produce more goods, it must employ more people. The secret of mercantilist success lies in the increased employment of labor.

For the power of labor is very great. Even putting to one side the facts that capital is the result of past labor, and that natural resources can be exploited only by labor, labor power is our ultimate power. The laziest, least competent, least efficiently applied labor will today produce far more than it needs to sustain itself. What Marx called surplus labor is exponentially greater than the 11.1 per cent his admittedly arbitrary calculations yielded. Hesiod (eighth century B.C.) was closer to the mark when he wrote in Works and Days: “From men the source of life has been hidden well/Else you would lightly do enough work in a day/To keep you the rest of the year while you lounged at play.”

Less poetically, we know that agriculture now produces more food than we should or can eat, more than enough natural fibers to clothe us, more than enough lumber to house us, with less than 3 per cent of our labor force (or less than 1.5 per cent of our population). Since even at our present Reaganite shabbiest, we allow almost no one to fall through the safety net and actually starve or freeze to death, it is plain that we do not need additional workers to provide for their own subsistence. Therefore, the output of every previously unemployed worker we manage to put to work will raise our standard of living a bit more above subsistence. And we can do this without importing gold or silver to control the interest rate. We simply have to get some sense into the Federal Reserve Board.

READING Braudel on mercantilism in the War of the Spanish Succession, I was struck by the parallels with our current business “recovery.” As I remarked in this space a year ago (” All You Need to Know about the Deficit,” NL, October 29, 1984), military spending increases aggregate demand, which increases employment. Any spending increases demand, for the simple reason that spending is demand. There are limits to some sorts of spending. Keynes cites the uselessness of two railways from London to York. On a more personal level, once you have a television set in every room of your house, your demand for television sets tends to subside. But military spending (because it does not and cannot face a test of profitability or indeed usefulness) has the political advantage of being supported by conservatives who insist the rest of the government be “businesslike.”

As far as the GNP is concerned, it doesn’t make much difference what the government spends its money on. The spending increases employment even when the newly employed people produce battle tanks that won’t run on rough terrain and fighting planes too complicated to service in the field.

The increase in the standard of living would of course be greater if the newly employed people rehabilitated highways and subway systems instead of battleships that were militarily useless two generations ago. It would be greater if the newly employed people built housing here on earth instead of stations in space. It would be greater if the newly employed people were cleaning up existing toxic wastes instead of producing new poison gases that will have to be burned or buried. Yet no matter how useless the things they produce, the newly employed people earn newly augmented incomes that they spend (up to a point), thereby increasing their own standard of living. And the addition of their new demand to the previous aggregate demand calls forth still further employment, and so on.

This outcome can be dramatized by asking what would happen if our present peacetime military budget were cut back, not to a rational peacetime level, but merely to the level of 10 years ago, when we were still winding down a war in Vietnam. The military budget would then be reduced by approximately $200 billion (or roughly the size of the deficit everyone fusses about). If such a reduction were not immediately offset by an increase in domestic spending, can anyone doubt the economy would forthwith crash into a depression that would make the Nixon-Ford recession of 1975 and the Reagan- Volcker depression of 1981-82 seem like paradise?

A deficit, in short, has the same salutary effect on the GNP as a favorable balance of trade; and gold and silver have nothing to do with it. As it happens, we are giving mercantilist theory another and more direct test. Our strong dollar, which is a euphemism for an unfavorable balance of trade, enables some of us to buy Pakistani sports shirts and Japanese automobiles at bargain prices. These bargains for some people, however, cause unemployment and underemployment for many people in North Carolina and New York and Michigan and ultimately throughout the nation. Critics of the mercantilist theory of a favorable balance of trade should ask themselves why an unfavorable balance has such unhappy consequences. I’ll give them a hint: We perversely distribute the benefits of our economy in a way that additionally punishes those who lose their jobs by denying them income to demand the bargains.

The New Leader

THE CANADIAN PRESS

OTTAWA — Canada’s trade performance hit a new low in July, establishing a record deficit of $2.3 billion as both exports and imports tumbled in the face of the weak global economy.

Making matters worse, Statistics Canada revised June’s deficit to $1.93 billion, even deeper than the $1.81 billion deficit originally reported last month.

Scotiabank’s economists noted that the strong Canadian loonie — which has risen to 13-month highs recently — likely played a role as the drop in exports was most pronounced in the American market, falling by 5.5 per cent to its lowest level since October 2010.

“This is about as bad as it gets for Canadian exporters — at least so far,” said Derek Holt, Scotiabank’s vice-president of economics.

Overall, exports fell 3.4 per cent to $37.7 billion and imports declined 2.2 per cent to $40.1 billion. In volume of shipments, exports declined by two per cent and imports by 1.2 per cent, signalling that trade was again a drag on the economy at the start of the third quarter.

Holt said the performance further calls into question the Bank of Canada’s continued hawkish stand on monetary policy, since any hike in interest rates at this point would likely lift the Canadian dollar higher and slow exports further.

In a statement, Trade Minister Ed Fast highlighted the importance of trade to Canada’s economy, noting that one in five jobs are tied to exporting activities.

“That is why we continue to open new markets to increase Canadian exports as part of the most ambitious trade expansion plan in Canadian history,” Fast said.

Canada and the European Union are currently negotiating towards a free-trade agreement, which the Harper government has said it would like to reach by the end of this year.

There are also negotiations at various stages with Japan and a group of counries known as the Trans-Pacific Partnership.

Trade agreements may be no substitute for sound global economic conditions, however.

After a rebound year in 2011 and a good start to 2012, Canada has now posted four consecutive negative months, each progressively worse than the last. July’s deficit edges out September 2010 for the worst on record in nominal terms.

Peter Hall of Export Development Canada said there was something different about the latest setback, however. The previous months there was always some special circumstance analysts could point to, but not in July.

“This is a broadbased drop. It doesn’t matter whether you are going to machinery and equipment, or autos, or energy or the agriculture side for that matter, they are all down this month,” he said.

“This is the blow-back from the summer setback in the global economy. It started with the collapse of the Greek election and panic mode essentially set in … and what that did was suppress consumer spending and business investment.”

Hall said he was somewhat encouraged that U.S. consumer spending picked up in July, which is traditionally a strong indicator for Canadian exports.

In the details, exports of energy products declined 8.5 per cent as crude petroleum shipments fell 9.6 per cent. Machinery and equipment fell 5.5 per cent, exports by 5.3 per cent, and agricultural and fishing products by 3.2 per cent.

Canada’s trade surplus with the United States decreased to $2.1 billion in July from $3 billion in June, the smallest surplus since October 2010.

Imports from countries other than the United States decreased 2.4 per cent to $14.7 billion in July while exports rose 1.2 per cent to $10.3 billion leaving the trade deficit at $4.4 billion, down from $4.9 billion in June.

11:16ET 11-09-12

AMERICAN COMPANY! DESIGNED IN USA! made in china (from the back of My First Checkbook) (Photo credit: Wikipedia)

We have all seen the stamp or sticker that says “Made in China” on products we see everyday. This makes sense because the U.S. imports from China have grown from $81 billion to $338 billion. Even with these numbers the “Made in China” stamp is still deceiving. Over the last two decades companies have spread across the world, meaning that many of the product that we use and buy everyday, are in fact not solely made in China, but actually are made throughout the world. China is usually the last stop for all of those products to get put together so they tend to get all the credit. China is just the one who puts it all together. So besides this being just a fun fact, why does this matter? Well this means that the trade deficit with China and the U.S. is a lot smaller than meets the eye, but this also means that the trade deficit with the other countries that are actually making the parts of these products is a bit more that we thought. This also means that China’s dependency on exports is not as much as we thought. Because China does not make the majority of most of the products and mainly does the assembly of them, that means they share the loss with other countries when there is a decline in exports. The only thing is that China does not suffer as much from the loss because they do not contribute the most to the product. This means that countries like Japan and Korea are suffering a lot more than China when there is a loss in exports.This information can cause us to think a little bit differently about the “made in China” stamp and instead, as it is said in “The Myth of ‘Made in China’” article, a stamp that said “Made Everywhere” might be more accurate.

http://experts.foreignpolicy.com/posts/2009/06/10/chinese_exports_are_not_exactly_chinese?wpisrc=obnetwork

Related articles

• Making It Easier to Sell Made in USA in China (businessweek.com)
• America’s Olympic Uniforms Are Still Made in China (theatlanticwire.com)

Over 2.1 million, or 76.9 percent, of the jobs eliminated or displaced were in manufacturing. These lost manufacturing jobs account for more than half of all U.S. manufacturing jobs eliminated or displaced between 2001 and 2011. The trade deficit in the computer and electronic products industry grew the most among manufacturing industries, eliminating or displacing almost 1.1 million jobs as a result.

“China is moving rapidly upstream into computers and other advanced technology products, which threatens core, high-tech manufacturing industries that still remain in the United States,” Scott said.

The states with the biggest net losses, in terms of the total number of jobs eliminated or displaced, were California (474,700 jobs), Texas (239, 600), New York (158,800), Illinois (113,700), North Carolina (110,300), Florida (106,100), Pennsylvania (101,200), Ohio (95,900), Massachusetts (92,700) and Georgia (87,300).  In 12 states, the jobs lost or displaced equaled or exceeded 2.2% of total employment: New Hampshire (2.94 percent of total state employment), California (2.87 percent), Massachusetts (2.86 percent), Oregon (2.85 percent), North Carolina (2.67 percent), Minnesota (2.66 percent), Idaho (2.65 percent), Vermont (2.43 percent), Colorado (2.38 percent), Texas (2.26 percent), Rhode Island (2.24 percent) and Alabama (2.20 percent)…

These conclusions about the jobs impact of trade with China arise from the following specific findings of the study:

• Most of the jobs lost or displaced by trade with China between 2001 and 2011 were in manufacturing industries (more than 2.1 million jobs, or 76.9 percent).
• Within manufacturing, rapidly growing imports of computer and electronic products (including computers, parts, semiconductors, and audio-video equipment) accounted for 54.9 percent of the $217.5 billion increase in the U.S. trade deficit with China between 2001 and 2011. The growth of this deficit contributed to the elimination of 1,064,800 U.S. jobs in computer and electronic products in this period. Indeed, in 2011, the total U.S. trade deficit with China was $301.6 billion—$139.3 billion of which was in computer and electronic products.
• Global trade in advanced technology products—often discussed as a source of comparative advantage for the United States—is instead dominated by China. This broad category of high-end technology products includes the more advanced elements of the computer and electronic products industry as well as other sectors such as biotechnology, life sciences, aerospace, and nuclear technology. In 2011, the United States had a $109.4 billion deficit in advanced technology products with China, which was responsible for 36.3 percent of the total U.S.-China trade deficit. In contrast, the United States had a $9.7 billion surplus in advanced technology products with the rest of the world in 2011.
• Other industrial sectors hit hard by growing trade deficits with China between 2001 and 2011 include apparel and accessories (211,200 jobs), textile mills and textile product mills (106,200), fabricated metal products (120,600), furniture and fixtures (80,700), plastics and rubber products (57,600), motor vehicles and parts (19,800), and miscellaneous manufactured goods (111,800). Several service sectors were also hit hard by indirect job losses, including administrative, support, and waste management services (160,600) and professional, scientific, and technical services (145,000).
• The more than 2.7 million U.S. jobs lost or displaced by the trade deficit with China between 2001 and 2011 were distributed among all 50 states, the District of Columbia, and Puerto Rico, with the biggest net losses occurring in California (474,700 jobs), Texas (239,600), New York (158,800), Illinois (113,700), North Carolina (110,300), Florida (106,100), Pennsylvania (101,200), Ohio (95,900), Massachusetts (92,700), and Georgia (87,300).
• Jobs displaced due to growing deficits with China equaled or exceeded 2.2 percent of total employment in the 12 hardest-hit states: New Hampshire (20,400 jobs lost or displaced, equal to 2.94 percent of total state employment), California (474,700, 2.87 per cent), Massachusetts (92,700, 2.86 percent), Oregon (50,200, 2.85 percent), North Carolina (110,300, 2.67 percent), Minnesota (72,300, 2.66 percent), Idaho (18,200, 2.65 percent), Vermont (8,000, 2.43 percent), Colorado (57,800, 2.38 percent), Texas (239,600, 2.26 percent), Rhode Island (11,800, 2.24 percent), and Alabama (43,900, 2.20 percent).
• The hardest-hit congressional districts were concentrated in states that were heavily exposed to growing China trade deficits in computer and electronic products and other industries such as furniture, textiles, apparel, and durable goods anufacturing. The three hardest-hit congressional districts were all located in Silicon Valley in California, including the 15th (Santa Clara County, which lost 44,700 jobs, equal to 13.77 percent of all jobs in the district), the 14th (Palo Alto and nearby cities, 32,700 jobs, 10.20 percent), and the 16th (San Jose and other parts of Santa Clara County, 29,000 jobs, 9.55 percent). Of the top 20 hardest-hit districts, seven were in alifornia (in rank order, the 15th, 14th, 16th, 13th, 31st, 34th, and 50th), four were in Texas (31st, 10th, 25th, and 3rd), two were in North Carolina (4th and 10th), two were in Massachusetts (5th and 3rd), and one each in Oregon (1st), Georgia (9th), Colorado (4th), Minnesota (1st), and Alabama (5th). Each of these districts lost at least 11,400 jobs, or more than 3.7 percent of its total jobs.

Full Report @

Press release @ Growing U.S. trade deficit with China cost 2.7 million jobs between 2001 and 2011 | Economic Policy Institute.

Anyone who reads corporate annual reports is well aware that many publicly listed companies regularly note they have large amounts of funds trapped offshore, unless they want to pay 35% income tax. One also notes that many re-insurance and insurance companies have quietly decamped to Bermuda with a more favorable legal environment and lower taxes, not to mention strictures on reserve levels and such.

The above does not even include taxes  at the state and local level which can easily raise this percentage to 38%.

35% encourages investment offshore
Needless to say, giving away 35% is not an  option popular among corporate chieftains. Besides, most companies earning income overseas can easily justify re-investing these funds overseas in factories, mines, oil fields, marketing and sales operations, design and development, and so forth. Why hand it to the feds?

Yesterday, I read the just-delivered annual report of a S&P 500 cmpany in which I hold stock, and which does nearly 50% of its business outise the USA. They have $410 million not repatriable without paying this 35% fee. They also noted that they had no current need of the cash for current business purposes within the US, and they had useful places to deploy it overseas. In the same report they noted three acquisitions outside the USA, roughly equivalent to the amounts cited. This is NOT an isolated example. It is a very well run, highly regarded corporation.

Drip, drip the Pace Accelerates
In effect, a US-domiciled company faces an immediate 35% cost disadvantage versus locating that same factory offshore and exporting into the US. If a large part of your business, especially a growing business, is offshore, why even consider the US. Those factories lined up on the Mexican border are not just looking for cheap labor.

The advantages of a non-US location are far greater than low-cost labor. This article cited recent examples AON, Eaton, Ensco International, Rowan and SaraLee spinoff D.E. Master Blenders. By the way, if you state your are moving offshore to reduce taxes, said action is against US law and you shall be chastised approrpriately. Don’t ask, don’t tell?

Advantages to be Foreign Owned
Then there is the glaring example of foreign-owned companies operating in the US who  pay very moderate US income taxes, if any. This has been documented many times. Legion are the legal ways to shift income to a more salubrious tax environment using inter-company transfer pricing and “purchase” by an offshore entity of diffferent services, royalties on patents and copyrights, ad nauseum.

Therefore a US company operating in the US faces a financial handicap versus its foreign-owned competitors by the amount of the federal income tax (less whatever pittance the foreigners chosse to pay to avoid criticism). No need to smuggle currency past the FINRA inspectors.

The Individual Offshore Option
Lately we have been treated to headlines how the IRS chased down thousands of tax evaders tucked quietly away – they thought – in Swiss banks. These were the failed tax evaders – certainly a relatively small portion of those who find this an interesting option. Rather like the drug dealers caught by DEA – the incompitent low-level fish.

The IRS is hiring 800 more agents which will be expensive and agonizingly unproductive (how much is the full-cost to employ a senior level lawyer or accountant possibly capable of tracking these bad boys down). This is tantamount to the IRS admitting publicly that the set of evaders is far larger.

The above paragraph might give a reader just a small inkling of how hard it is for the IRS to chase down and tax these iniquitous evaders of the exchequer.

Says the Curmudgeon of Staunton
Long ago and far far away in another universe (various foreign countries) the Curmudgeon gained considerable personal knowlege of how these things are done in other countries. The US is not a unique city on a hill shielded with a manifest destiny.

The issues raised here also relate to blogs Offshore and the IRS June 24 2011 and Tax the Rich? Millionaires gone Missing  blog August 25, 2011.

Raising taxes on those evil profiteers will have its due effect. Though not the morality play high-tax proponents seek.

Charles Dickens wrote “Hard Times – For These Times” (usually known as “Hard Times”) in 1854. This was a bleak analysis of mid-19^th Century factories and the mechanistic drive for material reward.

The world of the Industrial Revolution saw immense material improvement within a 19^th Century mindset that saw business develop on the back of “resources” – whether they were natural resources (like coal) or human resources – Dickens’s “quiet servants”. Resources were resources and how they were discovered, whose they were, the conditions under which they were mined, how they were shipped or the conditions under which they were placed into the manufacturing process were not much of a consideration.

Britain and other developing nations of the time grew wealthy on their own drive, ingenuities, financing and trading and manufacturing instincts but the whole process would have collapsed if access was not obtained to raw materials from the rest of the world and the use of “human materials” from all over (including their own countries). The terms “human resources” is still with us along with natural resources – but the “quiet servants” grew louder.

Gradually, from 1833 when Britain enacted laws that children under nine should not work in factories, throughout the second half of the 19^th Century and into the 20^th, our human resources (people working in factories and mining, for example, in the industrializing nations) campaigned and secured rights over income, health and safety, length of the working day and age restrictions.

Developed countries worked out that, to work well and succeed, we had to develop ways that we all could share to some extent in the benefits that material gain provided. This is the basis of free and fair societies based on successful economies.

From nation to global

The last thirty years has seen a vast shift from developed nations using the rest of the world merely to buy from and sell to, to a shift to manufacturing and now development and R&D throughout the world. Trade has grown internationally and the so-called integrated “global economy” is in place. We are no longer merely the industrialised west and the under-developed rest, but an inter-connected web of nations within one, world economy.

Yet, the strains are clearly showing. Allied to the vast changes in internet communications (similar to the vast increase of communications that shaped 18^th Century politics and the 19^th Century – the telegraph and the phone), all peoples of the world now see themselves as part of this world (or global) economy in the same way that 19^th and early 20^th Century factory workers saw themselves vis a vis factory owners. They then, understandably, demand rights and safeguards.

This is now happening on a world scale as we develop our global nation (economically).  The changes are profound and, if done properly, will be of enormous benefit.

21^st Century Responses

This week saw the approval after two years of the US SEC (Security and Exchange Commission) of articles 1502 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The two measures could have major implications for all of us in that (properly implemented) they set a real standard for the globalized economy in two, crucial areas:

1. the willingness of all of us to buy items cheaply no matter how the raw materials were obtained
2. the willingness of all of us to buy items from wherever in the world, no matter what corruption was employed in their provision.

Article 1502 refers to the mining of key raw materials in Africa such as tantalum, tungsten, gold and tin. It will (after an implementation period) require all suppliers and manufacturers to state that their products do not contain raw materials that financed war or bloody conflict. So many years after blood diamonds were headlined, there is now a statute that demands that companies step back and consider what they are buying. Manufacturers that buy such raw materials have had to count the cost of reputational disaster if they continue to sidestep basic human responsibilities in this global market. Now, there will be a legal imperative in the USA.

Article 1504 is the Cardin-Lugar rule which sets rules for country-by-country reporting of companies in the extractive industries concerning the revenues and profits they make in all countries where they do business (on a project by project basis).

Both articles require all companies that are listed in the USA to comply (although not immediately), wherever those countries are based. The European Union is expected to pass similar laws.

The implementation of the two articles will help to drive change on a global scale, where individual nations (e.g. where the resources are extracted) are unable to do so. Why? For several reasons:

1. Developing nations (especially resource-rich and economically poor) are prone to corruption and often unable or unwilling to enact these laws themselves;
2. Developing nations (especially in parts of Africa) use resource revenues to fund conflicts and wars;
3. Corporations operating in those areas need to show global sensibilities – where treatment in their overseas subsidiaries and employees is brought up to levels that we believe are credible and reasonable. It is hard to do that without legal change as competition is too high to expect corporate ethics (whatever that means) to work on its own.

To Ayn Rand libertarians Dodd-Frank is an economic travesty and many in the US are waiting for Romney and Ryan to get elected and reverse these laws. That would be the travesty. It is enough that in developing nations, the gaps between the rich and the rest are widening; it is enough that nations like Greece are now collapsing economically. There is potential for real strife in nations where inequality is too widespread.

But, we now live in a global economy where we are all dependent on each other. That means simply that best practice (that works on a national scale) has to be introduced globally wherever feasible. The intricate balance of trade, manufacturing, design and the need for natural resources (as well as the need to work together on climate change issues or disease control, for example) dramatically increase the need to treat the global economy as one economy – which it is. This means that national rights have to be respected but that is not enough.

Article 1504, for example, takes the trust element away from many nations like Equatorial Guinea, where the leadership is a kleptocracy and where riches from oil revenues do not go to the people in any meaningful form. Country by country reporting will, eventually, put an end to opaque deals between companies and those who have taken over the ownership of natural resources in those countries by showing transparently what profits are made and revenues generated on a project by project basis. Citizens in those countries will begin to be able to see how those revenues are used or not. Information is valuable and a first step to more equitable conditions.

21^st Century Ethics

As we enter the fifth year of the post-sub prime recession (with economic collapse in Greece and high youth unemployment in Spain), we remain much more concerned with ourselves than with people and nations thousands of miles away. The change that global economics has wrought, however, is that we can no longer ignore the plight of those so far away even if we (wrongly) wish to do so. Their plight is ours just as the impoverishment (economically and educationally) of our inner cities is a blight and our plight.

The Chinese view things differently, of course. A thousand years of relative impoverishment has left it hungry for economic growth and its hunger leads it to plunder the natural resources of Africa. China’s legalist centre, its Confucian heart and its loathing of western imperialism means that it is content to leave governance issues aside. Its own internal corruption (the corruption of a centrist and legalist government, where bribes are the common currency of the status quo) means that it is unlikely to require good governance in return for its acquisition of raw materials. In fact, its non-linkage of governance requirements gives China a distinct trading advantage in Africa.

It is to be hoped that this is a short-term business expedient and a long-term mistake for the Chinese. Just as the best manufacturers in the 19^th and early 20^th Century were leaders in improving conditions for their employees (notably, Henry Ford who wanted his own staff to be able to afford to buy his cars) and just as the US spearheaded safety rules in the 20^th Century, it is likely that the best companies will understand that improving the safeguards overseas (whether in their own companies or those of suppliers) will be important, medium-term investments.

Reputational loss is now potentially huge (as Apple realized when suicides at one of its biggest suppliers in China, Foxconn, began to rise and changes in working practices were required by Apple). The raw materials that we require for so many of the goods that we buy are obtained under horrendous conditions in Africa. It is not just blood diamonds but all those naturally occurring elements that the SEC has just regulated into law.

In addition, the country-by-country reporting will shine a light on the regimes that take in billions of dollars of income and disburse so little to their people. Pressure will mount from outside and inside.

Organisations like One, Transparency International, Global Witness and Enough and the Publish What You Pay coalition deserve huge credit for a relentless drive over many years to enact such positive changes. The US Congress deserves huge credit for bringing it into law in the powerhouse of the US economy. The EU should follow and they should all work within the OECD and elsewhere to ensure that these measures, providing an ethical underpinning to the global economy, are made global.

We live in a globalized economy and comparative advantages should be developed through intelligence, hard work and ingenuity – not via the impoverishment or hardship of our global neighbours.  The bringing into implementation of Dodd-Frank’s articles 1502 and 1504 suggests that the global economy is waking up to the fact that our “quiet servants” deserve respect wherever they are – close to home or further away. The global economy (and climate change and air travel and the internet….) means we are all neighbours now.

In my opinion, there are two border conditions for a new central agreement. First, wages are extremely sticky downwards, which is an empirically well-established element of Keynesian macro–economics (see e.g. this post by Paul Krugman on recent research). Note that this refers mainly to nominal wage rigidity. As the Finnish experience of the 1990s crisis has shown, wages may be sticky but a so-called ‘zero line’ is nonetheless (temporarily) effective in cutting real wages, at least if inflation estimates are more or less correct. Second, for Finland there is no use trying to compete in manufacturing with lower-wage countries. Finnish unit labour costs are simply relatively high, for a multitude of reasons, and simply trying to cut wages is not enough. Furthermore, Finland is where it is, so that there is always the extra burden of transport costs.

Here, I don’t want to discuss the potential of leaving the euro, because the only condition for when that is rational is when Finnish inflation is so high, that the negative effects on the exchange rate from leaving the euro are compensated by this. But since this is akin to throwing Finland’s financial credibility (AAA status etc) away, this is a completely insane idea. Only if Finland could credibly devalue against whatever currency Germany uses, without endangering the national economy, this might make sense but is extremely risky. If anything, currently Finland’s and Germany’s membership in the euro most likely represses their potential exchange rate against dollar and yen.

So, given these restraints, what can be done? Finnish companies in the export sectors can only compete on superior quality and the best service there is. These things do not reduce unit labour costs, but they make the price difference worth it. As for improving labour productivity, squeezing more work in less time is a kind of old-fashioned method. Re-organizing production processes, so that employees’ individual input can increase might be more effective and the trust endowed on employees might also reduce absenteeism and make for better well-being at work.

The truth is of course that Finland is a kind of post-national country when it comes to the value chains of the products Finnish companies sell. Pekka Yli-Anttila of ETLA had this presentation at some point, in promotion of a very good study of the value-added in the Finnish economy. The main point that he stressed, was that Finland shouldn’t be doing is the actual production of goods (like phones) – that should be done in lower-wage countries. For the Finnish economy this would leave design, R&D, sales, maintenance and branding.

To my idea, this very realistic scenario raises some very hard questions about the current system of industrial relations, the Finnish welfare-system and programs for re-schooling. If the ideas of Yli-Anttila are to be taken seriously, this would necessitate a great change away from the dominance of SAK and TEAM (as openers for collective agreement negotiations) and a very broad policy to move employees away from manufacturing to other sectors (or to other jobs within manufacturing that do not involve ‘making’ stuff).

In fact, the required changes do to some extent tie in with labour market shortages in some sectors, due to changing demographics. But simply said, I do not believe current politicians (of any party) have either the vision or the courage to promote the (admittedly radical) policies that are needed to keep Finland’s social, environmental and economic welfare intact. Now is the time – not to cut wages to keep manufacturing alive a bit longer,but to ensure that employees can get out before it is too late (I am not suggesting ALL manufacturing should disappear from Finland, I only suggest that a realistic view should be taken to industries in difficulties on the world market).

Regulations issued this week say mines and smelting companies must meet minimum output levels to continue operating. The state newspaper China Daily said Wednesday that might result in 20 percent of the country’s production capacity to be shut down.

By Joe McDonald
Associated Press

China has about 30 percent of the world’s rare earths deposits but accounts for more than 90 percent of production. It alarmed foreign manufacturers by imposing export curbs in 2009 while it tries to build up a domestic processing industry to capture more of the profits that go to U.S., Japanese and European companies that transform rare earths into mobile phone batteries, camera lenses and other products.

In this photo taken Tuesday, July 6, 2010, workers use machinery to dig at a rare earth mine in Baiyunebo mining district of Baotou in north China’s Inner Mongolia Autonomous Region. China’s government has tightened controls on rare earths production in a move that might inflame trade tensions with Washington and Europe. Regulations issued this week say mines and smelting companies must meet minimum output levels to continue operating. The state newspaper China Daily on Wednesday, Aug. 8, 2012 cited an official who said about one-third of China’s mines and half of its smelting companies might not qualify to remain open. (AP Photo)

Chinese officials have expressed hope foreign companies that use rare earths will shift production to China and share technology with local partners.

The United States, the European Union and Japan filed a World Trade Organization complaint in March accusing China of violating its free-trade commitments. Chinese officials have defended the controls as in line with WTO rules and necessary to protect the environment.

The restrictions are especially sensitive at a time when governments are trying to boost exports to reduce high unemployment. The United States and Europe are looking to increase sales of high-tech goods that include products made with rare earths.

The latest regulations appear to be an extension of Beijing’s effort to force rare earths producers to consolidate into a handful of large companies that will be easier to monitor and control.

Mines must have yearly output of at least 20,000 tons, while smelters must have production capacity of 5,000 tons per year, according to the Ministry of Industry and Information Technology.

Up to one-third of China’s 23 mines and about half of its 99 smelting companies will fail to meet the new standards, China Daily said, citing the director of the ministry’s rare earths office, Jia Yinsong. Jia said that would eliminate about 20 percent of China’s rare earths production capacity.

A ministry statement cited the need to protect rare earths resources and the environment and to promote restructuring of the industry.

The government also has limited the number of companies that are allowed to export rare earths.

China’s trading partners say export quotas and taxes push up rare earths prices abroad, giving buyers in China an unfair advantage.

One mineral, terbium oxide, costs $2,000 per kilogram on global markets this week, more than double its $863.47 price in China, according to Lynas Corp., an Australian miner. Neodymium oxide cost $105 per kilogram on global markets and $67.50 in China.

The dispute reflects the clash between Beijing’s free-trade pledges and its ambitions to transform China from a low-wage factory into a creator of profitable technology.

Rare earths are 17 minerals used to make goods including hybrid cars, weapons, flat-screen TVs, mobile phones, mercury-vapor lights and camera lenses.

China reported total exports last year of 18,600 tons, just 60 percent of the 30,000-ton quota, due in part to slack global demand. The government cut the export quota for the first half of this year by 27 percent from a year earlier to 10,546 tons.

The United States, Canada, Australia and other countries also have rare earths but most mining stopped in the 1990s as lower-cost Chinese ores came on the market.

Beijing’s decision to limit exports has prompted foreign producers to announce plans to reopen or develop mines in California, Canada, India, Russia and elsewhere.

CHICAGO (Reuters) – Corn and soybeans in the U.S. Midwest baked in an unrelenting heat wave on Monday with fears rising of big crop losses that will boost food and fuel prices and cut exports and aid from the world’s top shipper of the key crops.

The condition of the nation’s corn and soybeans as of Sunday deteriorated even more than grain traders had feared, and the U.S. Agriculture Department cuts its weekly corn crop condition rating by the biggest amount in nearly a decade.

In Southwest Minnesota where I live and in Southeast South Dakota which we drive through to get to Sioux Falls the corn plants are tall and green, but the cobs have not yet started to fill out and will not without a well-timed rain. In some areas the farmers have already started to cut the plants down to feed them to their cattle, giving up on the corn season.

This country depends on these crops not only to feed our own populations, but also to export to other countries. In fact, food is almost the only commodity this country manages to export and the balance of trade requires that we export something or it will become even more precarious. Thus the drought that is affecting the country has serious repercussions for the entire economy which, as we all know, is already in deep trouble.

But as I read about this situation, which borders on (that overused word) “crisis,” I cannot help but think: why are we surprised? Climatologists have been predicting these conditions for years and we have simply ignored them. We don’t like to worry about things that don’t affect us directly and we have a naive faith in technology that leads us to assume that every problem can be fixed — by someone. Though these are comforting convictions, together they spell disaster.

We should have seen this coming and we should have started doing something about it long ago. Some think it may be too late, and that may or may not be the case. It’s not just about the record-breaking heat. It’s also about the melting of the permafrost, the opening up of the Northwest passage, the record number of hurricanes and tornadoes. It has all been  predicted. But to this point it has been someone else’s problem. We are now starting to deal with the consequences of global warming  “in our own back yard.”

Perhaps now the situation will get our attention and we will start to recognize not only the problem itself, which is abundantly clear to all but the most delusional, but also the role of humans in creating the problem. If not now then assuredly when the food and fuel prices start to rise precipitously, or when we see reports of global starvation, or civil wars being fought over declining food supplies. At the very least, we must insist that this country shake loose from its reliance on fossil fuels and take major steps to accelerate growth in the clean energy industry. If we are to climb out of the hole we have dug for ourselves, we must start very soon to be part of the solution. To this point we have been only a large part of the problem.

The big policy and political question our country faces is how do we create that many jobs?

The missing element in all the existing plans is a robust trade policy that creates jobs here in the United States. For more than three decades, U.S. trade policy has tolerated closed foreign markets and encouraged the outsourcing of work. The consequences of this longstanding omission on U.S. job formation are enormous.

Let’s begin with the arithmetic of jobs. The U.S. Department of Commerce estimates that every $1 billion of trade equates to 14,000 U.S. jobs. Thus, a net trade surplus of $1 billion means 14,000 more American jobs and a net trade deficit of $1 billion means 14,000 fewer jobs. The math is that direct and simple…

via Pat Choate: Fair Trade Can Help Close America’s Jobs Gap.

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  POSTED BY JOB MARKET MONITOR ⋅U.S. jobs growth may have picked up earlier this year, offering the millions of unemployed hope that better days are ahead. But once again, the government’s monthly unemployment report comes with disappointing news. In April, the nation’s employers created 115,000 positions, after adding 154,000 in March, the Labor Department reported Friday. This was less than … Continue reading »

Wheat yields in developing countries, 1950 to 2004, kg/HA baseline 500 (Photo credit: Wikipedia)

English: A world map showing developed countries, developing and least developed countries. Português: Um mapa mundial indicando países desenvolvidos, em desenvolvimento e subdesenvolvidos. (Photo credit: Wikipedia)

By Dr Faisal Bari 

Can China and India have the per capita incomes that the North American and Western European countries enjoy today? What will the world be like if that were to happen? Do we have the kind of resources, around the world, to even consider the possibility? Can our environment sustain that level of living? And can scientific innovation and technological development achieve this?
Clearly there are things that are not possible, even from simple accounting perspective. Not all countries in the world can run trade surpluses. For some to run trade surpluses, others have to run deficits. If the game is about being one of the countries that has surplus, it is a competition game and the moment you think about the world as a whole the entire issue of recommending, to all developing countries, export oriented growth strategies, becomes a bit strange. We can have more overall trade, but, as mentioned, not all countries can have trade surpluses.

The issue of the developing world having per capita of the countries of the West is not an accounting impossibility, as with all countries running trade surpluses, but there are serious issues here. Does the world have the kind of resources, fossil fuels, metals and so on, as well as food, to allow such high levels of per capita for all? Even if we could produce a lot more food, can we have better fuels, and even if that is possible, can the environment sustain that level of consumption? Even if we do not know the answer to the first few questions, though they look improbable enough, the answer to the last question, about environmental sustainability, does look fairly clear. Unless there are really big and substantial changes in the way we deal with cleaning the environment and maintaining and managing it, the environment will not be able to support the current per capita income levels of West if they were to spread to large populations like India and China.

But this raises very interesting questions for everyone around the world, but especially for countries in the West. Despite the very high per capita income even currently in the West, pursuit of growth seems to be one of the main objectives of economic policy in these countries. It is seen, even post Washington Consensus, as the main means of providing for the poor and for those who are below the average income levels. Versions of trickle down still hold credence. In America, in particular, despite the fact that many researchers have shown clearly that income inequality has increased tremendously and social and economic mobility has decreased in recent times, versions of the American dream still survive and still tickle the imagination of many.

There is such tremendous opposition, in almost all of these countries, about thinking about redistribution as a means of making the fortunes more widely shared and more equal. Again United States is the true outlier here too. Inequality is not only higher in the US than in many European countries, and welfare state weaker and more incomplete (Obama health care reform has been termed socialist by many), there is a stronger sense, that comes through in surveys, that people feel that poverty is more the fault of the poor and they are to be blamed for their plight. And hard work can get people out of poverty and reduce inequality.

In contrast, while the welfare state is stronger in most European countries, and inequalities lower than in US, generally, more people, more realistically, also feel that poverty is not the fault of the poor. There are significant systemic issues that also explain poverty and they also explain, to an extent, that hard work alone might not be enough. But here too, apart from the higher taxation levels and stronger welfare states, there are no explicit discussions of the goals of development and growth and their limits and of sharing the fruits better through more specific redistribution programmes.

The vision, which was given as utopia by many early to mid twentieth century thinkers and writers, of a time when scientific and technological progress would allow humanity to have enough for everyone with the labour of a few hours a week only from each person, and allowing large amount of leisure time for people to cultivate other interests and pursuits, given the per capita of developed countries is today possible, but is not even being discussed. Instead those who have jobs work the full quota or more and a lot of people go without jobs and resources. But the solution that seems to be accepted by most, and as the only solution, is to somehow keep growing so that all can work at full scale. While there is no thinking on the utopia side, even though the utopia seems achievable. Is it the case that human want is really insatiable? And even if it has been culturally constructed this way, should it really be the case?

For the developing countries, the issues are different. Human need is still very large and deprivation is still at a very high level. Even accounting for redistribution issues, growth is needed and given the level of deprivation it is not feasible to even think of not recommending growth, whatever one might recommend on the side of redistribution.

But the issue, for the developing countries, to think about, is that do they have to follow the same route as the developed countries? Do they have to make growth the exclusive focus? Evidence from a lot of social protection programmes, from developing countries and at a very practical level, seems to be suggesting something else. Growth can be a focus but specific programmes that redistribute to the poor and get them out of poverty traps can help with poverty quite well and they can help in getting higher growth too. And more equitably and with a much broader base. Developing counties should explore these angles a lot more.

Environmental sustainability issues are not just the dreams or nightmares of naysayers. There are real issues here and ones that need to be addressed despite what is happening on the scientific and technological fronts. The pursuit of growth as the only goal and even as the main goal, especially by the developed world, but even in the developing world, is making these concerns even graver. But there does not seem to be any thought and/or dialogue about it at the popular level. Should there not be some thinking about these issues too?

The writer is an Associate Professor of Economics at LUMS

The writing first appeared in Pakistan Today on July 10,2012

Views expressed by experts in the Opinion Section are entirely their own and do no necessarily reflect editorial policy of MyGlobalCommunityToday.

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——

Something slightly different this time. In a reaction to this news, which says that Finnish exports suffer from the eurocrisis, I would like to present some data (all from Eurostat) on how Finland has fared since around 2007. The idea came from posts like this one by Edward Hugh, most recently about Slovenia. I haven’t managed to get completely similar data graphs, but these will do.

First of all, Finland is one of the few Eurocountries left with a triple-A status, which apparently gives it some clout regarding its wished in the ongoing resolution of the crisis (recall the demands for collateral on Greece, now repeated for Spain?). The triple-A status derives ostensibly from Finland’s low government debt, which is show below since 2007.

Finnish and German Government Debt

Although it is still much lower than Germany’s level, it is creeping upwards. But Finland is clearly one of the ‘good boys’.

Does the low interest rate of the ECB fuel a housing bubble in Finland? It does not appear to be so, at least for the aggregate, it is nonetheless a slowly upwards trend which has its own problems. But there might be a distinction between the capital area around Helsinki and the rest of Finland. I will try to figure that out using Eurostat data.

Also construction output is remarkably stable, not much affected by the eurocrisis. or showing signs of a bubble. One reason for this might be the pull of the Helsinki area, where there is a shortage of affordable housing.

But the low rates of the ECB may seem to lead to increasing inflation in Finland. This is in itself not so surprising at this moment, but it is part of the explanation of Finnish reluctance to go ‘all-in’ regarding interest rates, because these would lead to increasing inflationary pressure. A more detailed investigation of the various components of Eurostat’s inflation indicator will give a hint of the sources for the inflation, but I expect that these are mostly related to imported products (but that is an educated guess, will follow up).

This may also be seen in Finland’s worsening position on exporting goods:

As can be seen, this is a long term trend, although the crisis from 2007 onwards may have worsened this position. In a different graph, exports and imports to the EU show nonetheless that the balance is more positive, but barely so.

Finally, the primary balance of government budget shows that things have been slightly bad, but with the current government’s focus on getting the budget balanced, the budget deficit will probably soon disappear.

All in all, this is a very quick and dirty post about the current status of the Finnish economy- There are two things in particular that are worrying: inflation and the trade balance. The first has to do with the interest rate set by the ECB at a very low level, and the second with (presumably) declining demand in especially Germany and the rest of the world. Considering retail, domestic demand seems to be holding up quite well.

At least after the worst of the initial economic crisis, retail has recovered to its 2007 peak.

Many aspects of the economy are left outside this post, especially concerning unemployment and various export sectors, but the Finnish economy seems to be doing quite well still. It remains to be seen what happens to inflation and the balance of trade, though. For a small export-oriented economy it is not a good development that it might be importing more than it is exporting.

UPDATE:

I toyed around with Eurostat some more and I extracted more statistical information. First up is GDP per head, which does look good still for Finland:

Source: Eurostat

Two things do stand out however: the financial crisis in the early 1990s was indeed very severe and not unlike the present one (a lot could be learned from how Finland and Sweden dealt with their banking crises). Second, although the path of growth has been resumed it nonetheless looks like the Finnish economy is performing under its full potential (if we’d extrapolate the trend from pre-2007, it is clear the current growth track is at a lower level). But not bad at all.

Unemployment then. Finland has a union-managed system of unemployment funds, which means there is a large incentive to belong to a union (you get up to 500 days of a certain percentage of your last salary, more or less). This does not affect the level of unemployment, but it does reduces the human suffering.

Source: Eurostat

As can be seen, in the early 1990s the unemployment rate reached very high levels, not unlike what is seen in Spain or Greece (although those are worse in the present time). But although the unemployment rate has dropped since then, it is still quite high and seems to have stabilized around 7-8 %. Furthermore, the present crisis has again sent the rate upwards, at least temporarily. Behind this relatively high unemployment rate lies a complex story of economic restructuring which has to be told elsewhere, but basically it is from manufacturing to high-tech services (think Nokia, F-Secure). This has led to a large proportion of long-term unemployed, that is unable to find work since their jobs don’t exist anymore.

Source: Eurostat

This graph, which also shows the seasonal variation, shows that in Finland, even nowadays some 20% of unemployment is long-term unemployment. This is a potential problem in terms of the welfare-state but also politically, because these people are not so likely to have confidence in the current political parties, which, after all, haven’t managed to create policies that get them back to work.

“Bulk of power generating machines is arriving from China followed by US, Japan, UK etc.,” said Pakistan Machinery Merchants Group President Khurram Saigol.

KARACHI: The import of power generating machines is thriving with fading hopes of an early end to persistent long power outages across the country especially in the rural areas.

The province of Punjab is already in the grip of violent power riots whereas the situation in Karachi, the economic hub of the country, is comparatively better.

Traders said around 70-80 per cent of imported generators were finding their way to the heavily-populated Punjab province.

According to Pakistan Bureau of Statistics (PBS) the import of power generating machines rose to $72 million in May 2012 as compared to $50.58 million in April 2012, while it was just $54 million in May 2011.

Total import bill of generators for the July-May 2011-2012 period rose to $951 million as compared to $919 million in the corresponding period of last fiscal year.

Pakistan Machinery Merchants Group President Khurram Saigol told Dawn that imports may remain high till mid of July and much would depend on the duration of power load-shedding, however when monsoon season gets underway importers go slow down.

He hoped that the load-shedding hours may come down by two to four hours especially in Punjab as a result of short-term measure following directive of Prime Minister Raja Pervez Ashraf to resolve the energy crisis, but in the long-run the power outages will exist.

He said the sale of generators in Karachi was quite dull as compared to Punjab where the intensity of load-shedding was more severe.

He said only those traders of Karachi were doing a roaring business who were diverting their bulk of generators imports to Punjab and some other parts of the country. Khurram said buyers were taking costly ride despite increase in prices of generators on account of over eight per cent devaluation of the rupee against the dollar in the current fiscal year.

“Bulk of power generating machines is arriving from China followed by US, Japan, UK etc.,” he added.

He said he had urged the Federal Board of Revenue (FBR) to remove the 16 per cent sales tax on import of portable generators so that the prices could come down. “This will benefit the small household and cottage industry people especially during upcoming Ramazan,” he added.