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Geithner Push for Current Account Targets Splits G-20 Nations

donsutherland1

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Today, Bloomberg.com reported:

U.S. Treasury Secretary Timothy F. Geithner proposed G-20 members pursue policies to reduce trade gaps “below a specified share” of their economies, according to an Oct. 20 letter obtained by Bloomberg News. That suggestion today split the emerging and industrial countries.

“Setting numerical targets would be unrealistic,” said Japanese Finance Minister Yoshihiko Noda, while German Economy Minister Rainer Bruederle rejected a “command economy” approach and Indian Finance Minister Pranab Mukherjee said caps would be hard to quantify. In interviews with Bloomberg Television, Canadian Finance Minister Jim Flaherty said the idea was a “step in the right direction” and Australian Treasurer Wayne Swan called it “constructive.”


I agree with the ministers from Japan, Germany, and India. Current account deficits/surpluses are not solely outcomes of public policy, even as public policy can influence such balances. Instead, relative differences in competitiveness play a large role. Asking other nations to refrain from fully realizing the benefits of their comparative advantages is not realistic. Instead, nations that seek to reduce their own trade imbalances need to adopt policies and encourage their firms to become more competitive.

For the U.S., that would require much better educational performance (degree attainment/skill mix) than what has been occurring in recent years, increased corporate R&D (which has been sliding relative to foreign rivals and in which the pursuit of operational effectiveness has often supplanted the more important role of strategy--operational effectiveness can easily be imitated and, therefore, cannot lead to sustainable competitive advantages; strategy focusing on differentiation through new knowledge, etc., is much more difficult to replicate and can lead to such sustainable advantages), and a crash investment program to move away from dependency on imported oil (a sizable and persistent chunk of the nation's trade deficit).

But recognizing that U.S. companies are not always the best in the world, American workers are increasingly less skilled/less prepared than their foreign counterparts due to growing educational gaps, and replacing talk (which is cheap) with concrete investments (which can be difficult to argue for) requires far more effort and courage than merely asking others to refrain from realizing the benefits of their comparative advantages. The new U.S. approach is unrealistic. If anything, it would erode incentives for competitive improvement.
 

Missed AB

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There are a lot of areas of contention in your post. You seem to be spending time "bashing" the American worker, compaines, and education system, with a news report that a gov't official wants to have export caps.

Import tariffs and other methodology used to reduce imports historically has decreased the ability of an economy to peak perform, so I too am against such caps, but not because of any of the reasons you mentioned.
 

donsutherland1

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There are a lot of areas of contention in your post. You seem to be spending time "bashing" the American worker, compaines, and education system...
Many American companies are world-class. All most definitely are not. Many workers are highly-skilled. Nonetheless skill gaps exist in some sectors. Furthermore, there are shortages of workers in others.

The educational attainment issue is a real concern going forward. Tertiary degree attainment by Americans has stagnated since the early 2000s even as it is continuing to rise throughout the rest of the OECD, not to mention some of the major developing countries including Brazil, China, and India. The National Science Foundation, OECD, and others have documented this issue. In an increasingly demanding and dynamic world economy, lack of education can translate into skill/productivity gaps. Such gaps can only impede a nation's competitiveness by undermining productivity, limiting innovation, and locking it out of rapidly growing knowledge-intensive industries.

Rather than seeking essentially to regulate trade balances to deal with unsatisfactory outcomes, a far better policy would address the root cause of those imbalances. Unpleasant as the reality is, comparative advantages that are a function of national competitiveness play an important role. My point is that rather than trying to artificially legislate desired outcomes, policy makers should go about addressing those root causes (some of which I articulated).
 

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Again you are making a long reach of an assumption that the reason for the protectionism is due to failures of a country to educate.

I can show you stats on which countries have the best educational system, which country has the best medical system, which countries offer people the best chance to move up in society... I can show you stats on the countries of origin for patents... none of which is any evidence of protectionism. So I really don't understand how you are making the connection that protectionism is based on uneducated people, with lack of innovation causes trade imbalances.

You can start with something more logical. I have more money than you, therefor I can buy more stuff than you. The US will NEVER be a larger exporter to a country of people who make on average 3 dollars a day. But the cheap goods they can produce will be easily consumed by the US and other developed nations.

It has very little to do with education, innovation, skill, knowledge... The difficulty is not about making socks. The challenge is to make them at a price the masses are willing to pay for the socks. Untill wages are normalized globally (and that will never happen), this cycle will continue.

Europe was the US in 1880. The US was asia/mid east in 1880. They bought our energy (coal) and our cheap goods. Was there a knowledge gap in 1880? Maybe, maybe not, but no one cared. It's about money not brains. That's why it's called economics.
 

donsutherland1

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Again you are making a long reach of an assumption that the reason for the protectionism is due to failures of a country to educate.
Not even remotely close to it. I only suggest that a resort to protectionism is not a suitable remedy for U.S. imbalances. Instead, the major cause of the longstanding trade imbalances are relative comparative advantages among the U.S. and its trading partners. Those comparative advantages are shaped by a variety of factors, a few of which I specified. My list is not all-inclusive. Given that the major cause of the current account imbalance is the result of comparative advantages, effective public policy would address the factors that contribute to those advantages.

Now, why did I mention operational effectiveness of companies? I mentioned it because the notion that the U.S. can develop sustainable competitive advantages through cost leadership are false. Developing countries have cost structure advantages that cannot be realized in developed countries. Instead, a better route to developing sustainable competitive advantages is through differentiation in areas that the world's consumers find valuable and in ways that are unique and not easy to duplicate. In short, trying to compete strictly on cost is a losing proposition for the U.S. Competing on the basis of differentiation that provides customers with value not found elsewhere and that justifies a higher price is very much viable. But down the road, the educational outcomes issue could erode that opportunity.

Furthermore, sources of comparative advantages were far more limited in the 19th century when agriculture and manufacturing played a much larger role in the overall economic context than they do today. Now there are also sophisticated knowledge-intensive industries, some of which simply didn't exist even 30 years ago. Hence, knowledge plays a larger role than it did in the past and, not surprisingly, the OECD is placing greater emphasis on it.

Finally, it is a myth that the U.S. cannot hope to sell products to countries such as China. The reality is that others do it better. For example, while the U.S. exported just $1 out of every $195 in economic output to China in 2009, Germany exported $1 of every $63 of its economic output to China. In 2010, early data indicates that the German edge increased further. The reality is that the right economic value proposition can sell in China. But to succeed in that area, one has to understand the needs/desires of that country's rapidly growing consumer population, not to mention the dynamics that shape China's economy. Of course, one cannot expect to have trade surpluses with the entire world. Balances will reflect comparative advantages and a combination of good public policy and strong industrial competitiveness can lead to relatively balanced overall trade.
 

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Again you are making a long reach of an assumption that the reason for the protectionism is due to failures of a country to educate.

I can show you stats on which countries have the best educational system, which country has the best medical system, which countries offer people the best chance to move up in society... I can show you stats on the countries of origin for patents... none of which is any evidence of protectionism. So I really don't understand how you are making the connection that protectionism is based on uneducated people, with lack of innovation causes trade imbalances.

You can start with something more logical. I have more money than you, therefor I can buy more stuff than you. The US will NEVER be a larger exporter to a country of people who make on average 3 dollars a day. But the cheap goods they can produce will be easily consumed by the US and other developed nations.

It has very little to do with education, innovation, skill, knowledge... The difficulty is not about making socks. The challenge is to make them at a price the masses are willing to pay for the socks. Untill wages are normalized globally (and that will never happen), this cycle will continue.

Europe was the US in 1880. The US was asia/mid east in 1880. They bought our energy (coal) and our cheap goods. Was there a knowledge gap in 1880? Maybe, maybe not, but no one cared. It's about money not brains. That's why it's called economics.
Good post. I agree and have for quite a while that the problem is the disparity is in the cost of manufacture. Two key elemnets to production ate capital and labor. In a world where capital is fungible, that is corporations can spend their capital whereever they get the best return, naturally they will go where labor is cheapest, net of productivity. In a world of free trade workers get to compete not just in the U.S. but also throughout the world. People like Geithner understand this. They also understand that we have been living in a low inflation world in the developed nations because by moving our factories to low cost producers. Asia and eastern Europe being the highest growth area.

Think of the workforce as a pyramid. At the top, the best earners have certain skills but also there are a limited number of spots at the top. Having more "educated" people will not change the income pyramid. What will happen if we send everyone to college like Obama wants? We will end up with the type of underemplyment that India has.

Look at who works in the service centers in India. Which are considered somewhat good jobs there. These people have college degrees, and while we may not like their accents, they are fluent in a second language. In the U.S. that job currently would be held by someone with a H.S. degree. So education is like everything else. If you increase supply without the subsequent increase in demand you reduce the value. Now clearly this is looking with a broadbrush so there will so exceptions but in the whole essentially correct
The U.S. made the trade 20-30 years ago to trade the middle income jobs for lower inflation. That is what allowed us to keep piling up debt as the foreigners who had all these dollars from the current account deficit bought our debt and kept interest rates relatively low.

I had felt in the 80's when Reagan had the tax cuts that he had a bunch of savvy business people in the administration who understood that the government's bamace sheet was underleveraged. So they took advantage and were able to take on some debt. Now we are like an overleveraged company and trying to find a way off the ledge.

Interesting mess that these folks have to try and get out of.
 

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It is interesting times we live in today...

How do you have your portfolio diversified? I'm about 40% emerging markets and china. 15% govt bonds outside US. 25% US stocks and options. 10% oil. 5% short yen. 5% short US govt bonds

I also have gold and silver bullion and real estate holdings but I don't include that in the above...
 

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Not even remotely close to it. I only suggest that a resort to protectionism is not a suitable remedy for U.S. imbalances.
The protectionism discussed in the article you sited is NOT the US. It is CHINA who is using protectionism. They keep their currency low which removes a lot of incentives to buy imported goods... So YES I agree with you that protectionism is not a suitable remedy for the US imbalances - and you seem to agree with Gheinter...

No list is, however the items you sited do not support protectionist views. For example you said the US worker/company is less innovative than your country of choice here China. Yet china uses illegal activities to try to learn how the companies operate (see google). Do you know that ANY device exported to china needs to have the manufactured specs and code given to the chineese government so they can make sure it is not harmful and must have a China patent (yet they do little to counter knock-offs or honor copyrights.) I am not trying to argue petty points with you, but your claims do not hold up.

Given that the major cause of the current account imbalance is the result of comparative advantages, effective public policy would address the factors that contribute to those advantages.
How do you see educating people in the US better, will address the trade imbalance? I have something to sell you want to buy it from me for 5 dollars or the dollar store for 1? The public policy which needs to be addressed is in CHINA, and that is what the discussion was about. It is about currency manipulation.


why did I mention operational effectiveness of companies? I mentioned it because the notion that the U.S. can develop sustainable competitive advantages through cost leadership are false.
You are stuck in 1950. The US is not an industrial power anymore. We export information and technology... rather contrary to your original post of how stupid the American is and how horrible our education system is.

Do you know that the US HAS TRADE SURPLUSSES WITH MANY COUNTRIES?

Top Ten Countries with which the U.S. has a Trade Surplus

Competing on the basis of differentiation that provides customers with value not found elsewhere and that justifies a higher price is very much viable. But down the road, the educational outcomes issue could erode that opportunity.
Is it your believe that India, China, Mexico have a better education system than the US? I prefer my doctor to be American trained board certified, and so does the rest of the world when given a choice, why do you suspect that is?

Furthermore, sources of comparative advantages were far more limited in the 19th century when agriculture and manufacturing played a much larger role in the overall economic context than they do today.
And tomorrow will look nothing like today... my point which you seemed to miss is that Europe is still around.

Hence, knowledge plays a larger role than it did in the past and, not surprisingly, the OECD is placing greater emphasis on it.
I wonder why most successful Tech companies are based in the US if we are so bad at education? AAPL, GOOG, MU, INTL, AMD, IBM, HPQ, MSFT...

Finally, it is a myth that the U.S. cannot hope to sell products to countries such as China. The reality is that others do it better. For example, while the U.S. exported just $1 out of every $195 in economic output to China in 2009...
Seems like you did a good job of showing how difficult it is to sell US products in china. If only we were smarter and more innovative...

You understand on the one hand you are seeking a competitive balance, while on the other hand urging for policies which make American jobs more expensive and in-turn products more expensive.
 
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washunut

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It is interesting times we live in today...

How do you have your portfolio diversified? I'm about 40% emerging markets and china. 15% govt bonds outside US. 25% US stocks and options. 10% oil. 5% short yen. 5% short US govt bonds

I also have gold and silver bullion and real estate holdings but I don't include that in the above...
I am more weighted in multinationals. About 60/40 stocks and bonds. I have increased my emerging market bonds. Recently sold off my gold and silver.

I have to be a bit more conservative as I recently retired.
 

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The protectionism discussed in the article you sited is NOT the US. It is CHINA who is using protectionism.
Protectionism does not explain all of the U.S. trade imbalance with China. Other countries, including Germany and Japan run much smaller trade imbalances with China. Moreover, if one examines the increased valuation of the Yuan since 2000 (and I still believe it is undervalued on the order of 10% to perhaps 15%), the U.S. trade gap actually increased. Simple currency adjustments won't remedy what is a structural imbalance tied to comparative advantages.

Yet china uses illegal activities to try to learn how the companies operate (see google). Do you know that ANY device exported to china needs to have the manufactured specs and code given to the chineese government so they can make sure it is not harmful and must have a China patent (yet they do little to counter knock-offs or honor copyrights.) I am not trying to argue petty points with you, but your claims do not hold up.
China is not unique with respect to industrial espionage and China's trade surplus is not largely the result of piracy/intellectual property theft. The reality that many of the things companies do to achieve operational effectiveness are easy to imitate. Hence, any advantages resulting strictly from operational effectiveness are fleeting absent larger structural factors.

How do you see educating people in the US better, will address the trade imbalance?
One area would involve alternative energy. China's projected growth in energy resources is huge. China needs alternatives. A high degree of knowledge and innovation is required to develop that industry.

I have something to sell you want to buy it from me for 5 dollars or the dollar store for 1? The public policy which needs to be addressed is in CHINA, and that is what the discussion was about.
I profoundly disagree. China's practices are part of the problem. But U.S. imbalances are not solely the result of unfair practices. Some of the imbalance even lies with self-imposed export restrictions.

You are stuck in 1950. The US is not an industrial power anymore. We export information and technology... rather contrary to your original post of how stupid the American is and how horrible our education system is.
When I compared German and U.S. exports to China, I was not limiting the discussion to manufactured goods. I was using the entire base of exports.

Do you know that the US HAS TRADE SURPLUSSES WITH MANY COUNTRIES?
Of course it does. But overall the U.S. suffers from a chronic and significant current account deficit.

Is it your believe that India, China, Mexico have a better education system than the US? I prefer my doctor to be American trained board certified, and so does the rest of the world when given a choice, why do you suspect that is?
If you go back to the discussion, you will note that I was also discussing OECD countries. So that you know, those are generally highly developed countries. Where India and China are making gains is that they are closing gaps with the U.S. Given their much larger populations, they can have a lower attainment figure and still produce a larger pool of talent. In other words, 5% of 1.3 billion people with a given expertise creates a talent pool more than twice as large as a situation where 10% of 300 million people possessed the same expertise.

Seems like you did a good job of showing how difficult it is to sell US products in china. If only we were smarter and more innovative...
No. I'm not stuck in a "not invented here"-type syndrome. The reality is that others do better when trading with China. They offer the value Chinese consumers desire and realize the benefits of doing so.

You understand on the one hand you are seeking a competitive balance, while on the other hand urging for policies which make American jobs more expensive and in-turn products more expensive.
Seeking a large pool of better-educated persons through the education system lowers the costs of doing business. An increase in supply relative to demand lowers costs. It does not raise them. Moreover, expecting that companies devote more time and effort to strategic focus increases their economic profits in the long-term. Development of a process that is unique and not easy to immitate can lead to a sustainable competitive advantage and an ability to earn high economic profits. Merely buying the latest machine to lower costs is something any competitor can do hence any advantages associated with such equipment are fleeting.
 

Missed AB

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Bonds are a great way to get income if you're retired, If it's only for income, then great, but they will depreciate in value when people change ships and jump back into stocks... IMO. I do like the emerging market bonds though, pretty good rates.

Did the same with my GLD very crowded trade. Reminds me of DOW 100K and NASD 20K.

I have a ways to go before I retire. But I can't wait!
 

Missed AB

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Protectionism does not explain all of the U.S. trade imbalance with China. Other countries, including Germany and Japan run much smaller trade imbalances with China. Moreover, if one examines the increased valuation of the Yuan since 2000 (and I still believe it is undervalued on the order of 10% to perhaps 15%), the U.S. trade gap actually increased.
You're crazy! The currency of the US is backed by debt. The currency of china is backed by gold plus other currency notes from US, EU, etc... It's probably more on target of paraody with the USD not 8:1 if allowed to float to natural levels.

There lays your pricing power.

Simple currency adjustments won't remedy what is a structural imbalance tied to comparative advantages.
Your focus is on the wrong thing. China is closed to competition.

I own a small business. For simplicity here I sell art. Get me into the chineese market. Tell me how I can sell to the chineese? I have sold to just about every nation with the exception of China. I've tried ebay, web pages, paid ads... Get me in the chineese market. I'll pay you. Seriously if China is as open as you have claimed, then get me in. I have tried and I have had no luck. I have a product to sell. I want to sell it to china! Tell me how to do this.

Everything else you wrote is meaningless. I am not trying to discount what you wrote or your feelings, it's accademia. There is nothing to gain by us debating who's imbalance with China is worse, US or German. I want to offer you a proposition in the real world that can benefit both of us. You say that China is open and willing to buy american goods. I am willing to pay you CASH (I'll send it vai paypal to keep things simple). Get my company in the chineese art distribution market. The problem I have is there is no place to enter the chineese market.

I have a Matisse drawing that I am willing to use as an experiment with you. I can send you pictures if you wish/need. You sell it to someone in china for whatever price, ANY price + shipping, and I will split it with you (I'm keeping 100% shipping). Fair?

China is closed to outsiders. But hopeful you can prove me wrong.
 
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donsutherland1

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You're crazy! The currency of the US is backed by debt. The currency of china is backed by gold plus other currency notes from US, EU, etc... It's probably more on target of paraody with the USD not 8:1 if allowed to float to natural levels.
China has a fiat currency. It does have vast holdings of foreign reserves.

Your focus is on the wrong thing. China is closed to competition.

I own a small business. For simplicity here I sell art.
Protectionism explains some of the trade imbalance, I just noted that it doesn't explain all of it. Although China is open in many areas, there are some areas where significant trade barriers exist. Cultural imports, including art, is one such area where competition is restricted to state-owned entities. Often, "cultural areas" are the last areas to open up in developing countries.
 

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China has a fiat currency. It does have vast holdings of foreign reserves.
Everything is a fiat currency. Fine text books read paper is a fiat currency because we give it value because of how we feel about the country... Gold is a useless metal that only has value because we give it value. There is very little use for gold aside from jewelry and it's use in the semiconductor industry is fading as well. If you have doubts about the USD, buy the EU. If you feel the long term debt will raise interest rates in the future, short T-bills. Gold bullion is not the "protective" currency it once was. It should be used as a tax free transfer of wealth, that's it.

Yes it was poorly worded. China like most countries has paper currency. The backing I was referring to was that China as a nation is on firmer financial ground than the US. It's holdings are diversified. Our central bank does have gold, and it is just starting to invest into companies, but China is well ahead of us in this regards. They run surpluses vs our deficits. If the US and China were each companies and the money was their stock, which would you buy? I can make the argument for China's currency being undervalued, with a very nice P/E, low debt, and a lot of room for growth.

Protectionism explains some of the trade imbalance, I just noted that it doesn't explain all of it. Although China is open in many areas, there are some areas where significant trade barriers exist. Cultural imports, including art, is one such area where competition is restricted to state-owned entities. Often, "cultural areas" are the last areas to open up in developing countries.
I hope you understand that I was not being rude when I made this offer. The academic argument is one thing, but practice is another. I do hate when people tell me all the reasons that I am not selling to China. I am not selling to China because of 2 reasons. China does not have an open door policy. China's currency is depressed to prevent it's holders from having any pricing power to demand products from other countries.

As you can see I am willing to give away my product to gain admission. It doesn't matter about my education, my innovation, my drive, or anything at all that you claimed. The huge trade imbalance is evidence of the difficulty one has to sell a product in china. There are Chinese citizens who will travel to the US to buy things here.

There is demand for US goods in China. US furniture for example is highly sought after. The growing middle and upper class in China is looking for US goods. The Chinese gov't won't allow the average US company access to it's markets.

The point geightner was making was to allow the Chinese currency to float. Once it does, imports would be more favorable for China's citizens. That money exchange would further trade relations by passing more money to more people.

My offer still stands. I'll sell the item at a loss just to gain admission to the China game.
 

Missed AB

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Don to further the point.

Your original assumption was that I am unable to sell items in China due to my education deficits, among other things.

I challenge you to sell a SPOON to any citizen in china. I'll supply the spoon and cover shipping prices. You get the sale price. Find a market to sell a spoon. A regular stainless steel made in China spoon. When you realize there is NO open policy to American sellers in China, then I hope you would alter your assumptions. The problem is NOT the US, it is China.
 

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Don to further the point.

Your original assumption was that I am unable to sell items in China due to my education deficits, among other things.

I challenge you to sell a SPOON to any citizen in china. I'll supply the spoon and cover shipping prices. You get the sale price. Find a market to sell a spoon. A regular stainless steel made in China spoon. When you realize there is NO open policy to American sellers in China, then I hope you would alter your assumptions. The problem is NOT the US, it is China.
Something else we should be clear about. It isn't that the american worker is not educated or anything except they get paid materially more than their counterparts in developing parts of the world. A natural consequence is that America made the choice 20 or so years ago to trade manufacturing jobs here for lower prices. Like a lot of things at first it is a few jobs and now we look back at a materially reduced middle class.

It seems silly (or political) to blame China and their currency. If China raised the value of their currency what is more probable, all those jobs move back to the U.S. or they move to a low cost competitor of China Vietnam as an example.
 
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