The FT's Martin Wolf managed to find some encouragement in the final communiqué from the Seoul G-20 meeting. In a column earlier this week, he said that language describing the use of various measures of global imbalances and suggesting the need for action to rebalance chronic current account surpluses and deficits suggested that, under the radar, the U.S. and China are moving toward consensus on a way out of the apparent impasse reached in Seoul.
I told him that I marvel at his optimism. But let's say, for the sake of argument, that he's right and that the U.S. will move toward trying to produce more of what it consumes and exporting more of what it produces while China does the opposite. I think there remains the major question of whether either side can actually, physically do what is necessary to achieve rebalancing.
This question occurred to me last night after a chat with a friend from FedEx who mentioned that while his planes fly fully loaded from Asia to America, they return to Asia almost empty. Well, of course, that makes a lot of sense because we don't make much here in the United States that FedEx can take back. Of course, we do export to China, but in recent years our biggest or second biggest China bound export items have been waste paper and scrap metal, and those items go by ship. In the high-value, low-volume, high-tech category of goods that fly well, the United States, despite its self-image as the world's high tech leader, has a trade deficit that will likely exceed $150 billion this year.
Let's take a few major products to see how things might work. Steel, for example, is a key product for any industrial economy. The United States imports about 30 percent of the steel it uses while China has more steel making capacity than the rest of the world combined. So, in a rebalancing scenario, Washington would try to find ways to encourage U.S. companies to buy more of their steel from American producers. But the government would run into the problem that there may not be enough actual production capacity left in the United States to allow a substantial reduction in imports.
Of course, more production capacity can be built, but not in any short period of time. Construction of a new steel mill, even if anyone would have the courage to build one in the United States knowing that China's producers could at any moment unleash a flood of cheap exports into the market, would take one to two years.
At the same time, China already produces virtually all of the steel it uses and has enough production capacity to fulfill domestic demand many times over for a long time to come, even without increasing production capacity. So China's steel industry really can't rebalance. It can't sell a lot more than it already does at home, and if for some reason it stopped its overseas shipments it would be left with massive excess production capacity that could easily bankrupt its companies.
As another example, take the Apple iPad. Apple is an American based company to be sure, but virtually nothing in the iPad is made in America. Of course, the product is conceived, designed, marketed, and sold in the United States, but the components are mostly made in Japan, South Korea, Taiwan, and Singapore, and the assembly takes place in China. So rebalancing implies that maybe some iPad production would be switched to America.
In principle, there is no reason why the semiconductor chips, displays, and other key components of the iPad couldn't be made competitively in the United States and inexpensive assembly could, perhaps, be done in Mexico or elsewhere in Latin America. But that would mean that the major factories and investments that have been made in iPad production in Asia would have to be at least partly abandoned. That would result huge financial and job losses to which Asian governments would object.
I sometimes wonder if economists consider these structural, nuts and bolts issues when they talk blithely of rebalancing. These are not things that can be turned on and off like a spigot. It takes a couple of years to build a new semiconductor plant and costs $5-8 billion. Once that investment is made, it is not quickly abandoned unless there is some major change in circumstances.
In his column, Wolf insisted that the U.S. and China must achieve rebalancing fairly quickly in order to avoid protectionism. But is it possible that the action actually runs in the opposite direction -- that some degree of protection might be necessary in order to create the change in circumstances necessary to achieve big shifts in the location of production and thereby also achieve the holy grail of rebalancing?
Clyde Prestowitz is president of the Economic Strategy Institute and author of The Betrayal of American Prosperity.
MIKE CLARKE/AFP/Getty Images
As the G-20 talks get underway, we're thrilled to have Clyde Prestowitz guest-blogging for us over the next few days. Clyde is the president of the Economic Strategy Institute here in D.C. He served as counselor to the secretary of Commerce during the Reagan administration and as vice chairman of the President's Committee on Trade and Investment in the Pacific.
Be sure to check out his most recent book, The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era as well as his piece, Lie of the Tiger, from the November print issue of FP. -JK
First, Barack Obama was shellacked in last week's congressional elections. Then, the U.S. president was garlanded in India and Indonesia. Now he's in Korea, where he's about to be waterboarded by the G-20.
Oh sure, the G-20 will come up with some paper-over language that will allow everyone to sign on to some vague agreement that it might be a good idea to achieve global rebalancing at some undetermined time in the next century. But this is just what the Japanese would call tatemae -- the packaging or superficial appearance of things. The honne -- the truth or actuality -- is that whether he knows it or not, the U.S. president has arrived in Seoul to preside over the end of the Flat World.
In fact, the Obama administration is demonstrating a lot of schizophrenia about this. In India, Obama couldn't stop spouting the conventional wisdom about how international trade is always a win-win proposition and how those who express concern about the offshoring of U.S. services jobs to India are just bad old protectionists.
At the same time, however, Treasury Secretary Tim Geithner is calling for some kind of deal for the G-20 governments to take concrete actions to reduce their trade surpluses or deficits. To be sure, Geithner has quickly backpedaled from his original proposal that governments would set hard numerical targets for the allowable limits of surpluses and deficits at 4 percent of GDP. His first fallback position was that the numbers would be only voluntary targets or reference points. When that elicited a new round of incoming fire he retreated further to the current proposal for agreement that each country will take the measures it thinks necessary to reduce excessive surpluses and deficits. Hardly much of a deal at all.
Yet even this is a revolution. No matter how watered down, Geithner's proposal is a call for managed trade. It is an implicit admission that contrary to 50 years of the preaching of economists, trade deficits matter. Even bilateral trade deficits can matter if they are big enough because they distort capital flows and exacerbate unemployment in the deficit countries. Further, it is an admission that unfettered, laissez-faire free trade is not self-adjusting and therefore not really win-win.
This implicit admission by Geithner has been manifested even more strongly (but still implicitly) by some of our leading free-trade economists and pundits. Thus, Paul Krugman, a Nobel Prize winner and long a champion of conventional free trade has called for tariffs on imports from China. So has Washington Post columnist and eternal free trader Robert Samuelson, and even the Financial Times' economics columnist Martin Wolf has suggested that some offsetting response to China's currency manipulation might be necessary.
But Obama isn't going to get agreement to any of that in Seoul. None of the other countries want to face the fact that the United States cannot be Uncle Sugar and the buyer of last resort forever. In fact, Obama has asked both the Germans and the Chinese to help out a bit by consuming more and exporting less. The Germans told him bluntly to get lost and the Chinese told him somewhat more politely to get lost. So the honne is that the Germans, because they're Germans, and the rest of Europe, because it is in terrible financial shape and can't borrow any more, are bent on creating jobs by dint of export-led growth. Essentially, they are saying they are going to create jobs by taking U.S. jobs. The Asians are saying and doing the same thing. Neither Asia nor Europe is likely to take steps that will achieve significant rebalancing in any reasonable period of time. That, of course, means no new jobs for Americans.
The big question is whether or not Obama will respond to that refusal by taxing foreign capital inflows, imposing countervailing duties on subsidized imports, matching the tax holidays and other investment incentives used by China and others to induce off-shoring of U.S. production, and challenging the mercantilist practices of many Asian countries in the World Trade Organization (WTO). These are all measures that he could take himself in an effort unilaterally to reduce the U.S. trade and current account balances and thereby create jobs for Americans.
If he does, he is sure to be harshly criticized by the apostles of the conventional wisdom. But if he doesn't he is sure to be toast in two years.
TIM SLOAN/AFP/Getty Images
The Greek prime ministry announced a third austerity program yesterday, prompting protests from public sector workers. But some German MPs apparently felt it was not enough and recommended rather impolitic further measures: the fire sale of uninhabited Greek islands and cultural assets like, well, the Acropolis. This did not please the Greeks, who called for a boycott of German goods.
The sale of cultural assets surely goes a touch far. For one, Greece has a massive tourism industry. I doubt all those Americans would bother visiting the site where the Parthenon once sat. More importantly, and obviously, Greek cultural artifacts might be valuable to someone, but are invaluable to Greeks.
The sale of uninhabited or unused land actually strikes me as a decent idea -- the question is how it would be enacted. The idea of Greece marketing and selling an island to a billionaire might be crass, but seems workable. The idea of Greece selling sovereign land to Turkey? Less so.
Dan Kitwood/Getty Images
Last weekend, the Dutch coalition government, headed by Prime Minister Jan Peter Balkenende, fell apart. The Labor Party wanted all of the Netherlands’ troops out of Afghanistan by the end of 2010; the Christian Democrats wanted to agree to a NATO request to extend their stay. Labor pulled out, and now Balkenende needs to scramble to create a new government. It’s all a bit less dramatic than it sounds; Balkenende’s last three coalitions governments disintegrated as well.
But it’s ginned up some very dramatic bellowing from across the pond. None less than Secretary of Defense Robert Gates lamented the Dutch pull-out (the Orwellian New York Times headline, sadly now changed, read "Gates Calls Europe Anti-War Mood Danger to Peace").
The real stick the U.S. and NATO seem ready to use to punish the Dutch? Ejecting them from the G-20. Granted, it sounds a bit wet noodle-ish. But the Dutch have tried to get into the G-20 for years, and won their observer status by being strong international partners during the financial crisis. It's going to smart.
Warning: spoilers to follow.
This weekend, against my wife's better judgment, we went to see 2012, and it was everything its fans and critics said it would be: grandiose in ambition, ludicrous in conception, and technically wondrous in execution.
There are obviously a lot of silly things going on in the movie, not least the idea that you could keep such a thing as the imminent destruction of the planet secret from all but a handful of people, even while you are auctioning off golden parachutes. A fatal flaw of the film that as far as I know has gone unremarked upon, however, is its strange conception of global governance.
For one thing, it's ridiculous to think that the moribund G-8 would be the preferred international forum in which to hash out doomsday planning. And yet, we get Danny Glover as the U.S. president, leaning on his thoughtful Russian and Italian colleagues to help plan for the end of the world. China, though it builds and hosts the giant, arc-like ships that are supposed to save the chosen few from disaster, isn't a G-8 member and therefore this particular nuclear-armed fifth of humanity doesn't appear to get a seat at the big-boys' table.
Then there's India. Despite the fact that an Indian scientist nobly informs his American colleague of his (admittedly far-fetched) findings about how the sun's surging neutrinos are destabilizing the Earth's core, rather than keeping the knowledge to himself, nobody comes to rescue the poor bastard and his family when the meltdown begins. Instead, we are treated to a painful scene of him about to be swamped by a 50-foot tsunami, resignedly informing Washington's top geologist of his plight and the flood's unexpectedly rapid advance, before the line goes dead. And again, since India is not a G-8 member, his compatriots, representing another fifth or so of the Earth's population, don't seem to be on any of the arcs or involved in the discussions about their use.
So, suspending disbelief about the film's premise, here's a question for everyone: What is the proper forum for secret doomsday planning? The G-20? The U.N. Security Council? The P5+1 or the EU3+3? Every country for itself? Mssrs. Drezner and Walt, I'm counting on you to chime in here.
UPDATE: Drezner obliges! Go read.
European leaders are starting to follow suit; Britain's five largest banks have agreed to publish the pay of their key staff members, and will spread bonus payments over three years. French president Sarkozy has announced a set of even tougher and more broadly applied regulations.
Of course, not everyone thinks that bonus reforms are the way to go. Nobel prize-winning conomist Robert F. Engle III says
We shouldn't ban bonuses, but restructure the way they're paid so they're more commensurate with the risk the company is taking....What's important is we give the banking system the right incentives to figure this out. When companies get too big and too complex to fail, they would face a higher tax rate, which would go into a rescue fund. The banks are not excited about it, they would rather go back to business as usual."
The G-20 has just released its "leaders' statement" on the Pittsburgh summit. I'll have more on this in a minute, but the quick overview is that they patted themselves on the back once again for preventing a global recession and outlined what they agreed upon at this conference.
The highlights below the jump:
The British press corps traveling with Gordon Brown -- or tabloid writers, as White House spokesman Robert Gibbs might have it -- had a bit of a laugh this morning when a Downing Street flack announced that the prime minister would be a bit late for his own press conference because "the PM is just having a quick chat with Obama." (The White House had put out a release saying that Brown and Obama would have a bilateral session at 4:05 p.m., but it now appears that this morning's quick impromptu meeting was it.)
Fleet Street hacks are always on the lookout for signs that Brown is being snubbed by the U.S. president, and it was readily apparent that the PM is deeply irritated by all the chatter and speculation about his relationship with Obama.
Asked for a readout of their meeting, Brown launched into a short lecture. "I've been meeting the president all week and I’m not going to get into this game," he said, clearly annoyed.
Saying the two leaders spoke about Iran, Afghanistan, and the global economic crisis, he continued: "You guys should start to understand how international meetings work," directing his comments at British journalists.
"This has been a week in which the big issues have been climate change, nuclear weapons, solidarity in dealing with the Iranian issue, the fight against terrorism and how we deal with it, the economy and what we do now," Brown added. "Newspapers are reporting these as the big issues that have got to be dealt with."
Later today, the spouses of the G-20 leaders will be heading next door to Pittsburgh's Creative and Performing Arts high school to meet students and hear a performance by famed cellist Yo-yo Ma and country star Trisha Yearwood.
But former Argentine President Nestor Kirchner, whose wife is now running the show in Buenos Aires, won't be among them -- he didn't make it to Pittsburgh (guess that means he won't be getting a tea set from Michelle Obama).
In the State Department handout being passed around here, Nestor is incongruously grouped with French first lady Carla Bruni and South Korea's Kim Yoon-ok, the wife of Lee Myung-bak. He looks a little out of place.
Nestor didn't make it to the London G-20 summit in April, either, and nor did German Chancellor Angela Merkel's husband Joachim Sauer. I wonder: If Hillary Clinton had been elected president, would Bill have felt comfortable joining in these sorts of events?
News today that the G-20 has officially replaced the G-8 as "the world's premier economic forum," in the words of South Korean President Lee Myung-bak, was quickly -- and dramatically -- overshadowed by the revelation that Iran has a second, covert uranium enrichment facility.
British Prime Minister Gordon Brown, speaking to reporters here in Pittsburgh, said that "we must have answers from Iran" about its nuclear program by the Oct. 1 meeting of the P5+1, the permanent five members of the U.N. Security Council plus Germany. Any decisions about what to do vis-a-vis Iran would not be made before that meeting, he said.
"It's the third time they've been caught red-handed," Brown said. "There has been serial deception over many years."
The prime minister wouldn't get into specifics about what sorts of penalities Iran might face should it fail to comply, but indicated that if sanctions are needed, they will "clearly be of a banking nature" and would "involve energy" and new restrictions on technologies that could be used for nuclear purposes.
"I think the IAEA will see that there is a breach of regulations," Brown said. According to the evidence he'd seen, "this could not have been for a civil nuclear facility," because the "level of production was not sufficient for a civil nuclear facility but could have been intended for a nuclear facility."
On the G-20, Brown made a more sweeping statement than either Korea's Lee or Canadian Prime Minister Stephen Harper, who earlier insisted that "we are not replacing the G-8 with the G-20."
"The old systems of economic cooperation are over," Brown said. Canada is due to host both the G-8 and the G-20 next year, in cooperation with South Korea, and Harper said that the G-8 would become more of a forum for discussing development issues, security issues, and, "for lack of a better word, geopolitics."
Brown said that the G-20 today would be issuing a "very strong view on remuneration," a somewhat peripheral issue that has nonetheless dominated discussions surrounding the summit, on the insistence of French President Nicolas Sarkozy.
"We cannot be soft on these issues," Brown said some passion. "We have got to be tough … we will not condone the old system of bonuses … there is no return to the bad old days."
Brown also announced that G-20 leaders had agreed that it would be "premature" to remove the fiscal and monetary stimulus measures put in place over the past year, saying that "millions of jobs" would be at stake if countries acted too quickly.
Nevertheless, he said, "The action that we took at the London Summit [in April] has worked."
The extraordinary efforts by governments and central banks to prevent the global economy from collapsing over the past year seem to have worked. Growth is picking up again, and optimism is in the air. The question now on many people's minds here at the G-20: Is it time for an exit strategy?
Not yet, according to China. Despite a recent bout of optimism, including from U.S. Treasury Secretary Timothy Geithner earlier today, Chinese officials said this evening that the international economy remains "quite fragile" and that Beijing isn't ready to support the unwinding of the various stimulus measures that governments have put in place to counteract the effects of the financial crisis.
As the recovery has gained momentum, some analysts have expressed concerns that governments under budget and political pressures would begin dismantling their costly stimulus programs too early.
"We believe it is still too early to talk about an exit strategy because the world economy is not out of the woods and the U.S. economy is still on a downward trend," said Department of International Cooperation official Ma Xin in a press conference here in Pittsburgh. "If we pull out or wind down the policies completely we may undermine people’s confidence."
John Kirton, a political scientist at the University of Toronto and an expert on the G-8 and the G-20, said in an interview that his biggest worry was that the major economies would unwind their stimulus measures too soon. His hope is that world leaders will issue a "strong, unified message" on staying the course after several countries, notably Japan and Germany, recently indicated they would begin dialing their stimulus measures back.
Chinese officials also responded to questions about one of the hot-button issues hanging over this summit, the ongoing depreciation of the U.S. dollar, which has lost 11 percent in value against a basket of major currencies since January. China, which now holds at least $2 trillion dollars in reserves, has made increasing noises in recent months about its desire to eventually move away from the dollar as a global reserve currency.
Geithner had to reiterate
in his press conference today that "a strong dollar is very important
in the United States." He added that he expected the dollar to remain
the world's main reserve currency for "a very long time."
Xie Duo of the People's Bank of China said that Beijing supported "the stability of major reserve currencies," which he sees as an important condition for the health of the world economy. Nonetheless, he said, "Most experts realize that the composition of the reserve currencies is flawed," and "it is reasonable for politicians to voice their criticisms of the current system."
World leaders have begun trickling in to the Pittsburgh Airport, and the media center at the convention center downtown – which is in complete lockdown mode, with traffic banished and police everywhere -- has begun filling up. There hasn’t been this much international diplomatic excitement in town since Nikita Kruschev visited Pittsburgh 50 years ago today.
But there’s not going to be much action yet at the G-20 summit -- or at
least not until early evening, when Barack Obama hosts what’s being
billed as a “working dinner” at the Phipps Conservatory in Schenley Park, 2 1/2 miles from here. The president is due to arrive later this afternoon from New York.
Various do-gooder NGOs, including the World Wildlife Fund, the US Climate Action Network, and the Union of Concerned Scientists, have set up shop in the August Wilson Center a few blocks away, and are making themselves available to discuss their priorities, from climate change to poverty.
Unlike at the U.N. General Assembly, which is a huge public circus, nearly all of the action here happens behind closed doors, and then the leaders issue a communiqué at the end explaining what they are prepared to do next. In the November 2008 summit in Washington, for instance, the G-20 put out an action plan to coordinate reform efforts and bolster the International Monetary Fund’s ability to respond to what at the time was a blinking-red, throw-momma-from-the-train global financial crisis.
This week, the focus is no longer on crisis management but on putting in place the structural reforms that advocates say can prevent the next meltdown. We’ll see if anything with teeth comes out of this meeting -- Nicolas Sarkozy is beating the drums for changes in banker pay, while Obama and his Treasury Secretary Timothy Geithner are pushing for tighter capital requirements, Germany is obsessed with cracking down on tax havens, and the Canadians are trying to beat back a protectionist wave -- but we can expect the usual watered-down, lowest-common-denominator stuff to emerge at a minimum.
I’ll be interested to see if Geithner’s ideas for reforming the IMF gain any traction. The micro story is a technocratic one, but the macro story could be yet another sign that China is being welcomed into the inner circles of global power. The scuttlebutt is that the Treasury secretary hopes to persuade China to sign on to his priorities on capital requirements and other reforms in exchange for getting a larger share of control of the fund. Anyone know the Chinese word for “bribery”?
Note: I'll be blogging here today and tomorrow from Pittsburgh, which is proudly hosting the G-20 summit. I'll mostly be writing about the goings-on of this global confab, but first, some background on this gritty city where I grew up.
Pittsburgh is a town that seems to be in perpetual rebirth.
Mayor David L. Lawrence, for whom the city's celebrated "green" convention center was named, first began clearing out its downtown warren of slums, railroad tracks, and slaughterhouses in the late 1940s, installing the wedge-shaped park that stands at the nexus of the city's three mighty rivers: the Allegheny, the Monongahela, and the Ohio. At the same time, Pittsburgh became a pioneer in enacting pollution controls to bring its choking air pollution to heel. This is known locally as "Renaissance I."
The population nonetheless began declining in the 1950s due to a combination of white flight to the suburbs and job losses. Then, when the city's steel industry finally, and spectacularly, collapsed altogether in the 1980s as a result of aging technology, high labor costs, and competition from places like Japan and Germany, Pittsburgh launched "Renaissance II." This time, the city began reinventing itself as center for services like banking and health care, rather than heavy industry (and now, the longtime headquarters of global steel conglomerate USX, the tallest building in town, says UPMC, the University of Pittsburgh Medical Center). And it started a slow, grinding drive to complete and broaden the environmental cleanup that made Lawrence a hero.
For all its economic traumas -- more than 150,000 mill workers in the area were laid off after the 1981-1982 recession -- the city has somehow stayed afloat, even thrived in some respects. New visitors always express shock and awe when they emerge from the tunnels that divide downtown from the airport highway and see the city's breathtaking skyline, or when they walk its quiet leafy streets or expansive parks (one of which used to be "robber baron" Henry Clay Frick's personal hunting grounds). Reporters traveling to Pittsburgh for the first time always write the same story about how the city is nicer than outsiders imagine and how the city's officials wish everyone could visit so that they could see the "real Pittsburgh," not the smoky hellhole of yore (and photo editors usually choose the same picture of a quaint cable car in the foreground above the downtown "Golden Triangle").
But the city's residual image is hard to break. Never mind that only one major steel plant, the 19th century Edgar Thompson Works, is actually still in operation. Having a much-loved (or hated, if you live in Cleveland or Baltimore) football team called the Steelers means that the portrait Pittsburgh projects on the world stage is one of blue-collar toughness, even as its business community tries desperately to persuade investors that the city is a Mecca of high-tech innovation and human capital. (Fun trivia fact: Steelers owner Dan Rooney was recently named U.S. ambassador to Ireland.)
It's true that Pittsburgh has made great strides. But there's somewhat less to its latest renaissance than meets the eye. The city is a medical powerhouse, relatively speaking, in large measure because the county that surrounds it is the second-oldest in the United States, filled with thousands of elderly people who need a great deal of medical care. Its universities are, as the city's boosters like to put it, "world class," but the vast bulk of top-notch students from Carnegie Mellon and the University of Pittsburgh head elsewhere after graduation in search of a deeper labor market. Pittsburgh prides itself on being a leader in green technology, but so far such activities have not been driven by market considerations but heavily subsidized, either by the deep-pocketed foundation community, of which John Kerry's wife Teresa Heinz is a prominent member, or various government branches. Civic leaders have often had to strong-arm local politicians to do the right thing, often after trying everything else (that famous green convention center, for instance, was in large measure a Heinz project).
Still, merely sustaining what's here has been a hard-fought achievement. Yes, this town has generally shrunk while other U.S. metro areas boomed. With risk capital hard to come by, Pittsburgh's tech industry has never really had a breakout success like Massachusetts' I-90 corridor or Silicon Valley in California. But compare Pittsburgh with other post-industrial American cities, such as Baltimore and Detroit, and what's happened here looks like a downright miracle.
The city, ironically, has suffered less than others from the financial crisis because it never had a boom, let alone a housing bubble, in the first place. Today, Pittsburgh's unemployment rate is just 7.7 percent, compared with a national figure edging toward 10. Muddling through has its upside.
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