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Tag Archives: export

Two articles caught my eye this morning, one on plans for the Federal Reserve to tighten money growth as recovery allows, another on the growth of the US trade deficit.

I was surprised that the trade deficit had grown lately, thinking that lower exchange rates had already boosted US exports. In fact, that has happened, but the growth in oil imports has overwhelmed the export growth in heavy machinery and commercial airplanes. It is predicted that deficits may continue to grow as American incomes grow and import demand increases.

But how will the Fed’s plans affect that?

Bernanke said the Fed will likely start to tighten credit by boosting the interest rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks’ prime rate and affect many consumer loans. Companies and ordinary Americans would pay more to borrow.

Initial response is that borrowing will decrease and import demand–for better or worse–will probably decrease as well. But what happens to the interest income? Just a thought, but if the interest elasticity is inelastic (< 1), the actual quantity of debt will increase with higher rates.

The point of the rate hike is said to be controlling inflation, but what if the rate hike brings more money into circulation?

There is likely a mistake in my thinking here. Please point out my mistakes.

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Changes in oil prices are not usually that interesting for me, but I am a little dumbfounded by the connections these reporters assume. This story claims that prices are rising–now to about $82–because the stock market has boosted consumer confidence and the demand for oil products will rise as a result.

Another thing pushing prices up is the falling value of the dollar. Americans import so much oil that a falling dollar makes oil and gasoline more expensive. Of course, the falling value of the dollar is also adding to consumer confidence because the demand for US exports is going up. OK. In this indirect way the correlation makes sense.

Fine. But what about the effect of higher oil prices on everything else? We have seen it in the states since the 1970’s– Oil prices rise, manufacturing and transportation costs go up, investment and economic growth slow down. It seems to me then,  that as long as investors see oil demand correlated with market confidence, oil is working as a natural counterbalance to both excessive growth and excessive decline. Maybe that is a good thing, eh?

Or maybe some of these connections are suspicious. Maybe consumer confidence is more and more going to allow people to switch to alternative energy sources, at least in the developed world.

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More upsetting news about trade battles between China and the US. Last time it was tires, now it is steel pipe. The International Trade Commission gave approval for an import tariff of 10 to 16% on Chinese steel pipe.

Maybe not that much to be afraid of. The International Trade Commission is not international at all, but an independent federal agency that only gives advice to congress and the white house. They themselves have no legislative power, so the news is not that bad, though the commerce department has approved the tariff.

The United Steelworkers union, which was the driving force behind the tires case, joined with the Maverick Tube Corporation, the United States Steel Corporation and other American manufacturers in asking for import duties on Chinese-made pipe.

No surprise of course that American steel and pipe manufacturers are pushing for the tariffs. What I don’t understand is where are the American oil companies? The oil companies and their customers will be the ones paying the higher prices that result from the tariff.

The real fear is that the US is going to go even further with protectionist policy, and many countries will follow in retaliation. Like during the Great Depression, protectionism gets politically easier during hard times, and you can not get any more counterproductive.

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A Chinese think tank has come out with an essay that argues against pressure to increase the trading value of the Yuan. The general argument–a bit self serving–is that an increase in the exchange rate will hurt China’s growth and hinder the recovery of the global economy.

The essay also asserted that lifting the value of the yuan would not help narrow China’s trade surplus with the United States, as the Obama administration has claimed it would.

China’s cheap goods have helped foreign consumers facing hard times, and raising the value of the yuan could hinder global economic recovery, said the think-tank.

The last argument is the one that makes sense to me. Paying less for imported goods–especially when demand is inelastic–means consumers will have extra income left over for the purchase of other goods. Yes, that would help foster global recovery.

rmb100bNot sure how important this is for the U.S.–but it seems a significant story–that China has recently been striking deals with many South American countries to allow more trade. Nice for the Chinese need for  resources, like oil, and nice for the potential market of exported consumer products. Encouraging the deals, the Chinese are making development funds available to several countries.

All this is interesting because of the relative absence of U.S. influence in the region. The US economy is also greatly dependent on trade, so it seems strange that they would ignore the needs of nearby markets.

“This is how the balance of power shifts quietly during times of crisis,” said David Rothkopf, a former Commerce Department official in the Clinton administration. “The loans are an example of the checkbook power in the world moving to new places, with the Chinese becoming more active.”

One of China’s bigger deals was with Argentina, giving them easy access to the Yuan and encouraging the import of Chinese manufactured goods. It cost the Chinese 10 billion dollars, and recently they made similar deals with South Korea, Indonesia, and Belarus. It is said to “lead the way to China’s currency (becoming) a reserve currency.”

Is it worth it? Nice to encourage growth in export industries, but what is the value of your currency being used as a reserve currency? It will help your money from losing value during wide-spread recession.

So what?

Of countries in the developed world, Japan is apparantly being hit hardest by the global recession.

The 3.3 per cent reduction in GDP reported yesterday by Japan for the final quarter of last year is by far the largest economic contraction for any of the big developed nations announced so far, and dwarfs anything that Japan experienced during its infamous “lost decade” of growth during the 1990s.

Germany runs a close second with their GDP dropping by 2.1%. Comparatively, the US is doing well, with a slight contraction, and Britain’s economy shrank at a 1.5% rate in the last quarter. The author says Japan and Germany are suffering a bit more because their growth is dependent on large volumes of exports.

Now, my question. Are exports more vulnerable during a downturn? Or does a shrikage of export sales have a stronger impact on incomes? I don’t see why strong exports make these economies more vulnerable. 

(Sure, more vulnerable to protectionist policies, but I don’t think that is what is going on here.)

And why is China–another export economy–not hit harder? Yes, their growth rate is less, but still over 6% last quarter.

Please help.