Undervalued Chinese Currency

Chinese currency is one of the biggest issues linked to the US/ China trade relationships.

Chinese currency is not freely traded on international markets, it means that the price of it does not depend on supply and demand, it does not fluctuate. Chinese government simply declares an exchange rate. Chinese have pegged the currency, so that one U.S. dollar buys a little bit more than 8 yuan, but many economists say that if China's currency were allowed to trade freely, it would be worth more.

It is said that Chinese currency is 30-40% undervalued. In fact, this makes Chinese exporting products even cheaper and more attractive for foreign customers. At the same time, it makes the US products more expansive for Chinese buyers. It is good for the US consumers, but very bad for the US producers, who cannot compete with Chinese companies. It has an immense impact on the US economy, since China is the second largest exporter for the United States after Canada. 

The cheap Chinese currency has resulted in a wide trade imbalance between the countries. In 2010, China’s trade advantage with the U.S. was more than $252 billion. http://www.foxnews.com/politics/2011/01/17/obamas-push-china-currency-changes-cost-consumers/

To keep the currency cheap, Chine needs to keep on buying the US treasury bills, thus becoming the largest creditor of the United States. In its turn, this allows the Treasury Department to be able to keep long-term interest rates lower than they would be otherwise, resulting in lower mortgage and credit-card interest rates.

So, if China revalues its currency, it will result in decrease of imports from there to the US, it will probably shorten the trade imbalance between the countries. It will make it easier for the US companies to compete with Chinese which can possibly lead to the increase in the number of goods exported.

BUT  If Chine revalues its currency abruptly, it won’t have to buy so many US treasury bonds, thus the US will have to look for other “investors”. This will cause interest rates to jump upwards which means more expensive credits and mortgages for the US citizens. The US industries may be hurt because spending will go down. Banking and retail industries may also be hurt.

Most of the economists agree that sooner or later China will have to revalue its currency, on which the US government insists. The key issue here is time adjustment. The revaluation has to be done gradually, so both economies are not hurt and continue growing.  

From NAFTA Through CAFTA To FTAA

The biggest trend in global economy today is regional integration. Counties realize how beneficial it is to form free trade agreements with their neighbors and even to form trade blocks.

After creating NAFTA in 1994,the United Stated wanted to go further and has pursued trade liberalization with its neighbors in South and Central America. It all started when the US and Chile signed a bilateral free-trade agreement, the Central American Free Trade Agreement (CAFTA) was signed in 2005. Besides market access, CAFTA also viewed,from political perspective, as a way for the United States to support freedom, democracy and economic reforms in its own neighborhood. So, CAFTA breaks down trade barriers between the US and five nations of Central America – Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua plus the Caribbean country of Dominican Republic (Carbaugh, 2009).

 Critics of CAFTA argue that it is more of a “freer trade” than free trade because not all the barriers are eliminated. But it is definitely beneficial for the countries forming the block, especially for the US, to which about 80 percent of exports to Central America became duty free.  

But CAFTA is not the final destination. The United States are lobbying for the creation of a Free Trade Area of the Americas (FTAA) which would unite all of the nations in North and South America except Cuba.

I think that creation of FTAA would be beneficial for all of the countries in a long run, but at the same time there are too many obstacles to be addressed. It is hard to address interests of both developing countries of Latin America and advanced nations like the US and Canada. At the same time, agricultural, intellectual property rights, institutional issues need to be addressed and included in trade talks.

I think FTAA has a future, but it will take time for this ambitious economic initiative to be completed.

Future of the Port of Providence

According to Rhode Island Sea Grant there are 17 ports in RI and Providence port is the biggest of them. - http://seagrant.gso.uri.edu/coast/portsharbors.html

The port of Providence is one of the busiest ports in America’s Northeast, it is also one of only two deep-water ports in New England (another one is in Boston). Providence Port generates $200 million total economic impact on the region, thus being a critical economic engine for New England. More than a dozen of companies located there provide more than $60 million in direct business revenues and $16 million in revenue to local and state government (http://www.provport.com/ ).

According to Providence Working Waterfront Alliance, the city of Providence is considering zoning changes, which may harm the future working waterfront development. As laid out in the Providence 2020 Plan, the working waterfront would be rezoned for mixed uses such as residential condominiums, marinas, hotels, retail shops, and restaurants.

As can be summarized from the Providence Working Waterfront Alliance website, http://www.providenceworkingwaterfront.org/, the port of Providence is an essential part of the economy of the whole region, so it has to be kept and developed, due to the following facts:

·         There are no relocation alternatives for the Port of Providence;

·         Building hotels, condominiums will bring government revenues in a short-term, but keeping the Port brings annual revenues and economic development perspective for the region in a long run. Also, fully utilizing the port could bring extra business revenues and additional state and local tax revenues;

·         Providence working waterfront provides thousands of jobs. And, as an ongoing study of port development in Rhode Island has found that there is potential for 1,000 new jobs from cargo shipping, auto imports and the staging of offshore wind farms (http://www.offshorewind.biz/2011/03/28/study-shows-1000-potential-new-jobs-at-ri-ports-from-cargo-shipping-auto-imports-and-offshore-wind-farms-usa/ ).  

·         Providence’s working waterfront is the main source of heating oil for Rhode Island, Southeast Connecticut, and Central and Southeast Massachusetts.

I am convinced that the port of Providence is the key element of the region’s economy. Rezoning the working waterfront could be threatening for the economy in a long run. In my opinion, instead of spending money on building restaurants and hotels, government should consider investing money in the port development in order to create new jobs and increase business revenues and revenues from tax collection.

Russia and the International Monetary Fund

I’ve never really researched much about the relationship between Russia (my native country) and International Organizations until last week and pretty much all I knew was that we’ve been trying to join WTO for a long period of time and still unsuccessful. So, I’m not going to judge or criticize it. I’ll just try to put together some pieces of information I’ve found and summarize some interesting articles and reports of those international organizations to help first of all myself to understand, how IMF affected Russian economy. I will focus on the IMF’s role in the Russia’s transition to market economy.

Russia and the IMF

Based on:

“Russia and the IMF: Power Games” by Dmitri Niarguinen

http://politics.club.fatih.edu.tr/text/3/Dmitry%20Niarguinen.htm  

and “Russia and the IMF” by Nigel Gould-Davies and Ngaire Woods (1999). International Affairs pp.1-22.

The history of Russia’s relationship with International Monetary Fund was comparatively short but full of controversies. At one time Russia was the largest debtor of the IMF... In 2000 the relationship normalized and basically came to an end. The IMF has approved of the Russian economic performance and Russia, in turn, has announced a non-borrowing status and has placed priority to debt repayment and was actually ahead of the schedule – it paid the money off by 2004, according to the Central Bank of Russia. (http://www.cbr.ru/eng/statistics/print.aspx?file=credit_statistics/debt_e.htm).

Although Russia got its 1st lending from the IMF in 1992, the relationship between the country and the organization started in 1988.

Nigel Gould-Davies and Ngaire Woods named five phases of Russia/ IMF relationship as follows:

Phase 1: Advice but no money (1988- July 1991)

During the last years of Soviet Union, the country was on the edge of political liberalization. The need for reforms was obvious, but Russian foreign debt was huge, so the Soviet government started discussing membership of the IMF. But the Fund was reluctant to grant the USSR  full membership. Only in October 1991 ‘associate membership’ was granted limiting Soviet Union to technical assistance and advice but no call on the IMF’s funds.

In July 1991 the USSR applied for full membership of the IMF.

Phase 2: First attempts at stabilization (August 1991 – September 1993)

In order to become a full member and get financial support, the country had to undertake economic reforms suggested by the Fund. So, the country started its programme of privatization, liberalization and stabilization designed to create a full market economy.

Russia got its first $1 billion of the IMF support 7 months after the reforms started, in July 1992.

This phase already didn’t go the way it was expected to. As  Gould-Davies and Woods said, the IMF’s technical advice to Russia proved wrong in some respects, and it would later admit that deep structural reform at that time was crucial to Russia’s transition.

Phase 3: Reform and Political Change (October 1993 – March 1995)

As a result of the Phase 2, by 1994 inflation has risen from 4% to 15%, by January 1995 it went up to 18% - that was the cost of using easy credit to resolve economic problems. The government started looking for a non-inflationary ways to finance the budget. This led to a new relationship with the IMF, which was also trying to find more effective ways of helping Russia.

Phase 4: Stabilization and the rise of the oligarchs (March 1995 – November 1997)

This phase of the relationship was more successful. Money lending was combined with strict arrangements  and tight monitoring. In April 1995 Russia got $ 6.8 billion, which was the largest IMF loan to date with the exception of the Mexican bailout. By the end of 1995 the IMF was satisfied with Russia’s progress, and as a reward agreed on $10.2 billion loan, wich would be disbursed monthly over the peiod 1996-1999.

The stable exchange rate and 4% inflation were the results of the Russian government and the IMF collaboration.

Phase 5: The crash (October 1997 – September 1998)

Falling oil prices due to the East Asian crisis resulted in the continuing revenue shortfalls, which, together with high debt service burden, led to crisis in the summer of 1998. After difficult negotiation the IMF agreed to provide $11.2 billion of fund for currency support which, with contribution from the World Bank and Japan, made a package of $17 billion.

 ...

After the 1998 crisis everyone was predicting a long recession and uncertain relationship with the IMF, but the predictions didn’t come true. Starting with the year 2000, the economy of Russia was growing fast and in 2001 a non-borrowing status was declared.  

Rassia’s relationship with the IMF  up to 2000 were full of controversies. Many people criticized the role of the IMF in the transition of Russian economy. For example:

“The [Russian] government has accepted the basic principles and advice of the IMF decision-makers. These decisions have resulted in the current chaos which has not only led to the total collapse of the Russian economy, something unprecedented in peace time, but also is bringing the whole world economy closer to recession” - Boris Kagarlitsky, an economic advisor to the Duma (1998).

“Throughout these years, the IMF was telling us what budget Russia needs. And Russia was following the instructions. As a result, the finances of the country are destroyed, the military capability is nil, and industrial enterprises are abandoned. Thanks to the IMF, the once powerful country turned into an invalid” - Duma deputy Stepan Sulakshin (1997).

I personally think that during those 10 years of the Russia-IMF relationship, there were ups and downs, but Russia came a long way from communist economy to market economy with the help of the IMF. The fact that Russia had to comply with terms of the agreements in order to get financial support, at the end had helped the country successfully undertake necessary reforms, such as privatization, liberalization, banking reform; it also helped Russia to take under control inflation and currency exchange rates and get rid of export tariffs.   

Tariff System: Why the Poor suffer

"The United States was born as a low-tariff nation" BUT "The U.S. has far more trade barriers than most American politicians choose to admit" (authors unknown).

The picture seems to be nice - the effective US tariff rate is 1.6 percent. For expensive consumer goods such as cars rates are historically low and are continuing to reduce. But it's absolutely different story for the light consumer goods. Tariffs on these products are still at levels other industries last saw in the 60s and 70s. So, actually US has two tariff systems - for industrial high-tech goods an average rate is 0.8 percent and for cheap consumer goods it is 10.5.
It doesn't affect only consumers, but also the producers of those cheap goods. Such countries like Bangladesh, Cambodia, Nepal, Mongolia, for which clothes make up 90 percent of all exports to the United States, face average tariff rates of 14.6 percent - almost 10 times the world average (Edward Gresser, 2002).
It does not seem to be fair at all to me, especially when governments always talk about fighting poverty and supporting developing countries.

Below is an interesting proof of how the US government collects money from the poor people, thus "encouraging people not to be poor":

www.ncpa.org/pub/bg135?pg=2

 I've made some research about Russian tariff system. Although, the average tariff is higher than American, the system itself seems to be fairer talking about the poor. For example, the tariff on shoes is 15% no matter if they made of rubber or leather, the tariff on all non-alcoholic beverages is the same, the difference in cotton and silk tariff rate is not as significant as American (referring to http://www.russian-customs-tariff.com/). Of course, in order to compare and draw more accurate conclusions, more tariff rates need to be studied.

I've also found another very interesting article by Edward Gresser "America's Hidden Tax on the Poor" (2002), which explains everything in greater details and gives some possible suggestions and recommendations, which I find to be reasonable. He suggests to treat tariffs as taxes, which is unlikely to happen because this way the government will lose a source of revenue;  to adopt a special relief for poor countries, but this would not help fighting poverty within the country, and tariff elimination through Doha Round of WTO sessions because not only USA has problems with tariff system.

After all above mentioned it is obvious that the country needs to consider a tariff reform along with continuing negotiations on tariff elimination on international level.

Terrorism as a new Trade Barrier

"We're learning to live with terrorism" ( Hugh Johnson, chief investment officer at Johnson Illington Advisors).

No matter how sad it is to admit, but we have to deal with terrorism as a factor, which affects various aspects of our modern life. It greatly influences global trade thus becoming a new kind of trade barrier.

The scheme is simple: terrorism leads to insecurity, which causes government to restrict border security measures, which, in its turn, raises the cost of doing business. Also, when government spends immense amount of money on security they have to cut expenses in other areas. Thus, investment in infrastructure such as roads, transportation system and so on may be cut down, which could lead to decrease in trade between nations.

After recent terrorist acts in Russian subway (last year) and at Domodedovo airport few months back it was announced that the Russian government would spend over $1,6 billion over the next three years to increase transportation security, especially of the Moscow metro system, which is the second busiest in the world. http://homelandsecuritynewswire.com/russia-spending-16-billion-bolster-transportation-security

Of course this is something that has to be done, since the government is in charge of its citizens' security, but that also means the money outflow from the other sectors of the economy. In a long run this can affect competitiveness of Russian business and the volume of trade between domestic companies and their foreign partners.

In my opinion, there is nothing much we can do about it. Countries have to spend money on security measures, because safety of citizens is priority #1. It is the price we have to pay. But some steps can be and need to be taken in order to support and ease cross-border trade between countries and their strategic partners.

The role of government in increasing comparative advantage - Detroit's Big Three example

                               http://www.bnet.com/blog/auto-business/auto-industry-bailout-looks-like-a-long-shot/298

The situation on the US automobile market doesn't seem to be promising - American carmakers' market share is already less than 50%. It's hard to believe that just few decades back the Big Three (General Motors, Ford and Chrysler) had more than 70% of the market.

Can the Big Three really compete with foreign producers? I don't think so...

The main reason why is the fact that the US companies are burdened with huge amounts of health-care costs and pension obligations of thousands of retirees.

By 2007 GM had more than $60 billion of obligations, which is around $1,500 on a per-vehicle basis. That year UAW agreed to a partial reduction of social obligations for GM (from $61 billion to $46 billion) and Ford (approximately $5 billion reduction). But even with those reductions the US carmakers can hardly compete with foreign auto companies, which are based in countries that have national health-care systems.
It all proves that health care is still one of the biggest issues in the US, the solution has to be found if the government wants to keep the business running and wants to increase competiveness of the US companies.

Comparative advantage in a particular industry can be created through the mobilization of resources: labor, technology, capital; and government can be actively involved in creating such industrial policies, which could promote and boost dynamic comparative advantage (Carbaugh R. 2009).

Thus, it is obvious that industrial strategy in the US automobile industry needs to be reconsidered.