The Challenge of a Changing China

Lower than expected growth numbers from China on Monday have raised worries that China’s economy may be losing momentum.  Forecasted to have a growth rate around 8%, China’s actual growth came in at a lesser 7.7% for the January to March quarter, compared with 7.9% in the previous three months. This slower growth is in part due to lagging recoveries in the US and Europe causing China’s exports to decline. However, it is important to note that major, if understated, structural changes within China’s own economy have also contributed to these unexpectedly low growth numbers.

Rapidly rising wages have led to a systemic shift in the way China’s economy currently operates and have caused the country to move away from its traditional reliance on low cost manufacturing. China is looking towards a transition to a more sustainable economic growth model and these numbers might be indicative of the growing pains that China is currently facing. In fact, according to Ms Yao of Societe Generale,”Given Beijing’s goal of restructuring the economy, a relatively moderate economic growth is not a bad thing in the longer term.” While China will likely remain a manufacturing hub thanks to its relatively mature investment environment, superior infrastructure, and skilled workforce, it is the higher-knowledge industry sector and domestic consumption that will be the future drivers of Chinese growth.

Improving wages and job opportunities have created an optimistic and vibrant consumer class that has demanded both a higher standard of living and higher quality goods and services. Metaphorically speaking, Chinese citizens are emerging from the factories and entering the malls. Rather than being a mere base of production, China has become a prime market to sell into as consumption continues to increase. This massive and complex market holds huge commercial potential for those businesses that can successfully adapt and gain a foothold. Meanwhile, China itself can benefit greatly from increased foreign direct investment as its economy continues to mature.

Despite China’s economic dynamism, it is still a place that is plagued with many dilemmas that limit its potential. Some of the most infamous issues revolve around corruption, which is especially rampant at the local level leading to staggering pollution, serious quality control issues, and enormous levels of inequality. In addition, China’s educational system is stunted by its singular focus on testing and needs to be reworked to foster creativity and innovation, skills that are vital in an increasingly connected global marketplace. These concerns may limit China’s global economic potential, especially when major policy efforts are still needed to address these critical domestic problems.

Overall, China is still dealing with the disorder commonly found during major economic transition. Its switch from a primarily manufacturing economy to a consumer economy may take time as growth rates begin to rebalance. In fact, it is likely that  these declining numbers indicate not economic problems in China, but an economic changing-of-the-guard that will result in less dramatic, healthier, and more reliable economic growth.

Posted by: Matthew Goldberg

Sources: The Economist, BBC News, Bloomberg, CME Group

Photo Credit: China Pavilion courtesy of flickr user Wojtek Gurak

Reinvigorating Trade Negotiations: Optimists in the Midst of Battle

Free trade advocates are known for being optimistic; espousing the removal of trade barriers that are often jealously guarded by domestic constituencies as part of the national interest. The global movement towards free trade as envisioned by the World Trade Organization has always been an uphill battle, but this month it has had its fair share of reasons for hope. Negotiations for trade agreements have been struck between the EU and Japan as well as the EU and the US in the Transatlantic Trade and Investment Partnership TTIP), and Japan announced its bid to join the 11 countries negotiating the Trans-Pacific Partnership (TPP). These will be the most comprehensive trade agreements in history if they are fully realized, and the collective member countries constitute nearly 70% of world GDP. The conclusion of these trade deals, although bilateral, would be a great step forward in defining comprehensive free trade standards for the global market.

The reasoning behind this reinvigoration of free trade deals is expressed clearly in a study commissioned by the German Federal Ministry of Economics and Technology, as explained below:

The transatlantic free trade initiative needs to be considered against the backdrop of (i) eroding competitiveness of industrialized countries relative to emerging nations such as China and India, (ii) the long-lasting standstill in multilateral negotiations at the World Trade Organization (WTO), and (iii) the need for growth-stimulating structural reforms, as vividly highlighted by the current crisis in the EU.

The impetus and goals of these agreements are not only economic in nature, but also geopolitical. The Information Technology and Innovation Foundation (ITIF) describes “a battle being fought now for the soul of the global trading system”, in which these free trade deals can promote high standards for reducing barriers to trade and set the agenda for future multilateral trade talks.

However, as  ITIF notes, there are many obstacles to overcome in this process. Agriculture, automobiles, cultural industries, and textiles are all industries that are historically reluctant to liberalize. Non-tariff barriers such as incompatible regulatory systems are even more problematic, but liberalizing these areas will bring the most benefits. The services market is another complex area, but because 30% of manufacturing costs are business services, there are strong economic incentives to liberalize trade in services. Since a large part of trade volume between these countries is intra-industry and intra-firm trade, companies’ costs for intermediate goods will be substantially reduced. Although most studies focus on the static and immediate gains from these trade deals, the dynamic and ongoing benefits will create positive feedback that renews the economic foundations of industrialized nations.

This is an opportune moment for trade deals, and the window may be closing fast. The political will is currently there to complete these deals, but may not last after the woes of the latest recession have tempered. Europeans and Americans are trying to stimulate their languishing economies, and Japan is pursuing radical new policies to end stagflation. Geopolitical considerations and a renewed emphasis on international competitiveness are the final pieces of the puzzle that make the deals more plausible at this point in time.

There are reasons for optimism in trade policy circles, but the battle is only just beginning.

Posted By: Ben Copper

Sources: IFO Institut, Information Technology and Innovation Foundation, Foreign Affairs

Picture Credit: Cargo Ship Terminal Burchardkai (Hamburg, Germany), courtesy of flickr user      Reinhard_Schuldt

Womenomics: Unlocking Women’s Not-So-Hidden Economic Potential

In the perpetual quest to improve economic growth and prosperity, leaders often ask questions such as: “How can we attract business to our shores?” “What can we do to raise export levels?” “How can we innovate to compete in the global economy?” While these questions are crucial to economic success, many developing and even some developed nations overlook an abundant and easily accessible driver of economic growth that makes up around half the world’s population: women.

Utilizing women to their full potential can play a crucial role in raising productivity and economic output. According to the World Bank’s 2012 World Development Report, women now represent 40 percent of the global labor force and more than half of the world’s university students. It seems obvious that allocating women’s skills and talents in activities that make the best use of those abilities will result in tangible economic benefits. In 1950, only one-third of American women of working age had a paid job. Yet today, US girls now do better at school than boys, more women are getting university degrees than men are, and females run some of the world’s best companies, such as PepsiCo, Archer Daniels Midland and W.L. Gore. Furthermore, a study by McKinsey found that when women went from holding 37 percent of all US jobs to nearly 48 percent over the past 40 years, the productivity gains associated with this modest increase accounted for approximately one-quarter of our current GDP. Undoubtedly, unlocking the economic potential of women has contributed to the sustained economic growth of the US over the last decades.

However, economies where women are not well integrated in the work force face significant disadvantages. This loss of productivity and economic duress is illustrated in the case of Japan, which has faced persistent economic stagnation. According to Kathy Matsui, chief Japan equity strategist and co-head of Asia Investment Research at Goldman Sachs, “Narrowing the gap between male and female employment rates, through increased participation of women in the labor market, could help Japan’s economy grow.” For example, 70% of Japanese women leave the workforce after their first child, and only 65% of college-educated women are employed. Barriers to higher female employment include insufficient childcare and nursing care support, tax distortions, and inadequate focus of the private and public sectors on diversity. It is no coincidence that Japan’s economy has struggled as women continue to be systemically underused.

Better enabling women to enter the labor force should be a key priority in nations looking to increase economic growth. The Economist reports that the increase in employment of women in developed countries during the past decade has added more to global growth than even the economic emergence of China. Therefore, it would serve countries well to eliminate obstacles that prevent women from entering the workforce and create programs that encourage the participation of women in the economy.

Posted by: Matthew Goldberg

Sources: The Economist, Goldman Sachs, World Bank, McKinsey, AARP International

Photo Credit: Woman working courtesy of flickr user SMU Central University Libraries

A Health Care Nation

2013 will be the year that America becomes “The Health Care Nation”, according to a recent article in Fortune magazine. Reactions to the new health care law will make health care the center of national attention once again, with the majority of the Patient Protection and Affordable Care Act’s provisions scheduled to take effect on January 1, 2014. The Centers for Medicare and Medicaid Services predict that by 2020: health care spending will have reached 20% of GDP (with 50% of that amount provided by the government), growth in national health care expenditures will outpace GDP growth by 1.1% on average, and Medicaid expenditures will grow 20% in 2014 alone due to increased coverage. Meanwhile, a recent Bank of America poll of leading CFOs reports that 60% cite health care cost as a key economic concern for the nation and 58% cite health care cost as a key economic concern for their company. The only greater concerns are in regard to U.S. government effectiveness and the budget deficit, both of which are strongly affected by health care costs.

Economists disagree over whether or not rising health care costs harm American businesses’ competitiveness in global markets, a crucial question due to the fact that the US spends far more on health care than any other country. The Council on Foreign Relations recently released an “Expert Roundup” on this topic. Robert Graboyes of the National Federation of Independent Business took the position that new health care legislation is hurting American competitiveness because it creates an uncertain financial planning environment and Neeraj Sood of the University of Southern California claimed that “rising healthcare costs have significantly reduced employment and output growth among U.S. businesses”.  Jennifer Baron of Harvard University insists that the indirect costs of poor employee health, such as low productivity, are twice the cost of benefit spending and so the emphasis should be placed on improving wellness rather than controlling spending on insurance plans.

Rapidly rising health care costs have been shown to negatively impact both businesses and workers. It is a common view among economists that increases in health care costs are offset by lower wages in the market-based system of employer-provided health care. A study by the RAND Corporation claims that since wages are generally sticky and do not react quickly to market value changes, rising health care costs can have negative impacts on businesses’ cost competitiveness, employment levels, revenues, and value added. This effect is exacerbated in industries that offer coverage to most of their employees, such as the automobile industry, and have less of an effect on industries that do not, such as retail. To make matters worse, a study by the Institute of Medicine posits that up to 30% of national health care expenditures are wasteful due to excessive cost, unnecessary treatment, and missed prevention opportunities.

Obviously, health care is a rising concern for the U.S. government, American businesses, and individual Americans. The issue will take years if not decades to be corrected, but a sustainable trajectory for health care costs must be found to ensure U.S. economic stability. It will be up to lawmakers to decide whether a focus on costs, value, or employee wellness is most appropriate (or most likely some combination of these factors). No matter what decisions are made, they are sure to affect every American in this “Health Care Nation”.

Posted by: Ben Copper

Sources: Fortune, Bank of America, Center for Medicare and Medicaid Services, Council on Foreign                          Relations, The Economist, RAND Corporation, Health Affair, Institute of Medicine

Photo Credit: Hospital Bed, courtesy of flickr user: APM Alex

Do traditional measurements misinterpret global trade?

As the world economy becomes more interconnected, it has become clear that import/export trade figures by themselves do not fully capture how much the US contributes to global commerce. Imports and exports merely measure the trade in completed products between nations and present a flawed picture. On the other hand, metrics such as US foreign affiliate sales provide information on longer-term investment and entrenchment in foreign markets, thereby giving a substantially different, and perhaps more accurate, look at what the US provides in goods and services.

Taking a look at exports trade data, a country like Ireland looks inconsequential to US trade with only $7,276 million (USD) in exported goods. However, Ireland is actually an important hub for transnational companies, and rakes in huge amounts of investment as shown by the foreign affiliate sales which puts Ireland at around $171,895 million, a number that eclipses Mexico at $143,478 million. Using only exports, Mexico is our number two trading partner for exports, but when we use the Sales/Export ratio, Mexico stands at 0.9, whereas Ireland is at 23.6.Without accounting for foreign affiliate sales, policy makers would have no idea of the importance of Ireland to US commerce. In addition, using foreign affiliate sales sheds light on other trade relationships, including Germany a country that many policymakers are worried about due to our supposed trade imbalance. In actuality, while US exports with Germany are only at $48,161 million, the US foreign affiliate sales are at $244,785 million and a ratio of 5.1. This means that the US is very much invested into Germany and the trade imbalance is not as nearly as significant when looking at both sets of metrics. This also presents an interesting note on the relative significance of trading partners. Policy-makers often stress the importance of China to US trade, but when looking at foreign affiliate sales, China is only at $138,991 million compared to Germany’s $244,785 million. This has the implication that the US actually has more trade interests in Germany, which is something that is completely unacknowledged when measuring using only export trade.

Using only export numbers presents an incomplete depiction of US trade. It is very difficult to make smart policy that improves US trade potential if the true trade relationships between the US and foreign countries are not understood. In terms of trade importance to the United States, opportunities lie with the newly proposed Trans-Atlantic Trade Agreement at almost $1,473,483 million in foreign affiliate sales. The United States must begin to rely more on foreign affiliate trade data or at least use it to supplement traditional import/export measurements to get a more accurate representation of US trade interactions.

Posted by: Matthew Goldberg

Sources: U.S. International Trade Commission, Vox, OECD, U.S. Census Bureau

Invitation: Money and Banks in the American Political System Book Launch

The Program on America and the Global Economy Presents a Book Launch:

Money and Banks in the American Political System

Thursday, March 14, 2013

3:00 – 4:30 p.m.

Featuring:

Katie Lavelle, Author, Ellen and Dixon Long Professor at Case Western Reserve University, and Wilson Center Fellow ‘08-‘09

Moderated by:

Kent Hughes, Director, Program on America and the Global Economy

About the author: Kathryn C. Lavelle is Ellen and Dixon Long Professor of World Affairs in the Department of Political Science at Case Western Reserve University. She is the author of Legislating International Organization: The US Congress, the IMF, and the World Bank (2011) and The Politics of Equity Finance in Emerging Markets (2004). She served as the William A. Steiger Fellow in the American Political Science Association’s congressional fellowship program, where she worked on the staff of the House Committee on Financial Services. Kathryn also served as a United States Studies Fellow at the Woodrow Wilson Center from 2008 until 2009.

About the book: “With the 2008 financial crisis still sending shockwaves through the US economy, debates over money are embedded in national politics and contemporary conceptions of the American dream. In Money and Banks in the American Political System, Kathryn C. Lavelle explores the complexity of the political institutions that surround finance, and traces the modern instability to the nexus between market innovation and regulation in a society that is wary of allowing business and state to interact and suspicious of any concentrated power in one political or economic institution.”

Please RSVP acceptances only to page@wilsoncenter.org

For a map and directions see: http://www.wilsoncenter.org/directions

Please bring photo ID and arrive 15 minutes ahead to allow time for the security checkpoint.

Sequestration: A Harsh Reality

In the second part of our two part series on sequestration, we are disheartened to report that $85 billion in cuts are due to take effect today as Congress failed to reach a deal to avoid sequestration. This development could hurt US growth prospects and dampens domestic and international confidence in Congress.

The sequester is reported to have a variety of deleterious effects on the US economy. Deutsche Bank’s chief U.S. economist, Joseph LaVorgna, stated that the sequester could take 40 basis points off 2013 gross domestic product, “and possibly higher, depending on whether the fiscal multiplier is positive.” This sentiment is reflected by the IMF, which last Thursday reported that the sequester would likely cut US growth rates in 2013 by at least 0.5 percent if the cuts are fully implemented.

According to the Office of Management and Budget, “should sequestration remain in place for an extended period of time, hundreds of thousands of families will lose critical education and wellness services through Head Start and nutrition assistance programs. The Department of Defense will face deep cuts that will reduce readiness of non-deployed units, delay needed investments in equipment and facilities, and cut services for military families. Federal agencies will likely need to furlough hundreds of thousands of employees and reduce essential services such a food inspections, air travel safety, prison security, border patrols, and other mission-critical activities.”

However, the consequences may not be as dire as first predicted and it could take a while before the cuts begin to negatively manifest themselves. For example, most of the pain will only gradually roll over Americans, CNN Money explains. Starting today, agencies will limit their contracts and grant awards, but furloughs won’t take effect until March 26 or later—the IRS, for instance, has said it won’t furlough anyone until after the April 15 tax filing deadline, the Washington Post reports. This means that the US may not immediately feel the effects of sequestration but rather, the sequester cuts are more akin to a slow burn rather than a searing heat.

While there are doubts about the extent to which sequestration will harm the economy and the American people at large, one thing is certain, the debate over the “sequester” has highlighted the scale of divisions in Congress and suggests that hopes of a grand bargain are becoming slimmer and slimmer. Furthermore, with the next mini-cliff scheduled to hit on March 27, it is hard to expect anything other than future Congressional tumult and further economic uncertainty.

Posted by: Matthew Goldberg

Sources: Associated Press, Office of Management and Budget, CNBC, Business Insider

Photo Credit: Cutting your Spending courtesy of flickr user Tax Credits

The Consequences of Sequestration

With Congress once again unable to reach any type of deal, it appears as though the US was able to vault the fiscal cliff only to fall right back into the pit of sequestration. This threat of the budget sequester—in other words, automatic, across-the-board cuts in funding—is soon to become a painful reality that would significantly hamper US economic growth.

The cuts were born of the epic 2011 fight over the debt ceiling. The idea was to create a “trigger” so onerous and indiscriminate that both parties would have an incentive to devise a smarter way to reduce deficits. Instead, the bipartisan committee was unable to reach an agreement and now Congress is faced with the undesirable but increasingly likely prospect of sequestration. This would mean $109 billion in automatic spending cuts, with defense spending being cut by 13 percent. The sequester would also lead to a short term contraction in GDP, since government spending is a component of GDP calculation. This contraction in growth would be compounded by Federal Reserve policy. For example, IMF research suggests that under current conditions, with slack in the economy and the central bank’s policy rate close to zero, the multiplier on government spending may be higher than normal. Moreover, the substantial cuts in spending would force the federal government to decrease pay and lay off government employees, an event that is highly adverse to both US economy and morale.

All this could be avoided if Republicans and Democrats can concede on issues closest to them. For Republicans, that would be tax increases, whereas for Democrats, that would be entitlement spending. Despite both sides wanting to avoid the sequester, it seems that Republicans and Democrats are unwavering in their stubbornness and it is becoming less and less likely that a deal will be struck before the March 1^st deadline. It is a testament to the ineptitude of the Congress if they allow the sequester to inflict economic harm that could have been circumvented through logic and compromise. Instead, it remains to be seen whether the sequester will take effect or if another down to the wire political spectacle awaits.

Posted by: Matthew Goldberg

Sources: Economist, CNN Money, Forbes

Photo Credit: budget courtesy of flickr user 401(K) 2013

Guest Contributor William Krist: Exchange Rate Manipulation

Negotiators for a Trans-Pacific Partnership Free Trade Agreement need to address currency manipulation when they meet March 4^th in Singapore.  Deliberate manipulation of foreign exchange rates by a number of countries is one of the most egregious of all unfair trade practices today.  By maintaining an artificially low exchange rate, a country in effect imposes an extra charge on imports (equivalent to a tariff) and also gains an unfair trade advantage in the U.S. and third country markets.  While this practice has long been recognized as an unfair trade practice, international trade rules have no effective provisions to address this issue.  The U.S. wants the Trans-Pacific Partnership agreement to be a template for future trade agreements.  To achieve this goal, currency manipulation must be addressed in the agreement.  (To read the entire paper, click here)

William K. Krist is a Senior Policy Scholar at the Woodrow Wilson Center.  He is a former Senior Vice President of the American Electronics Association.  He has written extensively on trade, development, and the environment.

Global Trade and the State of the Union

Unsurprisingly, the State of the Union address focused primarily on the domestic economy. President Obama emphasized issues such as the looming sequester and the need for immigration, entitlement, and tax reform. In terms of major announcements on the international trade front, the President revealed that the US aims to start talks with the EU towards creating a “comprehensive transatlantic trade and investment partnership.” This is a significant development for a multitude of reasons. A free trade partnership between the US and the EU would streamline trade by reducing regulatory barriers and tariffs, thereby expanding the already huge amounts of exchange. Not only would a transatlantic free trade agreement heighten the interconnectedness of these two massive markets, it would drive growth, deflect increasing competition from China, and would help reestablish the authority of the United States and Europe as leaders of the global economy.

The President also announced that the US is on course to finish negotiations over the Trans-Pacific Partnership, an agreement that will substantially increase US trade presence in the Pacific. There was no date given about when the talks would be complete, but it appears that things are falling into place. In addition, the President outlined some domestic economic policies that were relevant to global trade issues. For instance, President Obama’s unveiling of the “Fix-It-First” program, which intends to put people to work on urgent infrastructure repairs, could improve US trade performance through more efficient and faster travel times. Smart Grid enhancement would make the US a more appealing place to do business and it would protect vital information trade-lanes from cyber disruptions. The energy boom, both through enhanced fossil fuel production and clean energy development, will allow the US to dramatically increase its energy exports and could fundamentally transform the global energy trade. Through the creation of innovation centers, President Obama wants to accelerate the continuing trend of re-shoring in order to increase US export trade.

While domestic issues were clearly the main theme of the address, it is vital that President Obama address the larger context issues of global trade to enact policy that will take advantage of new economic opportunities. It would also be a mistake to underestimate the potential of trade as a key engine of economic growth for the US and the global community. A secure and healthy global economic structure is important in order to maintain further international stability.

Posted by: Matthew Goldberg

Sources: Wilson Center, United States Trade Representative, ABC News, Department of Energy

Photo Credit: Presidential Seal courtesy of flickr user Dave Newman