Global economy

Appel à Communications
Le Cercle des Économistes Congolais (CEC) a le plaisir de vous inviter à soumettre une proposition de communication à la 4e édition de son colloque international qui aura lieu le 7 septembre 2019, à Bruxelles, sur le thème:
"Industrialisation, PME, et Développement Durable en R.D. Congo".
Les propositions doivent être transmises par courrier électronique jusqu’au 12 aout 2019 par email au: Prof. Jean-Claude Maswana, [email protected] ou [email protected]

The China-US trade imbalance is as contentious as ever. The rhetoric and potential consequences are getting serious. On March 1, 2018, President Trump announced he would impose a 25% tariff on steel imports and a 10% tariff on aluminum. The tariff will raise the costs of imported steel, which are primarily from China. Trump's move comes a month after he imposed tariffs and quotas on imported solar panels and washing machines. It looks like president Trump is resorting to another populist rhetoric rather than getting to the bottom of what is inherently a structural feature of globalization itself.
When trying to put a finger on the causes and remedies to the China-US current trade imbalance it would be useful to gain an understanding of what is really driving these exports, and who is actually instigating this trade imbalance. The key point I’m making is that while the China may enable this trade imbalance through an undervalued currency, among other measures, US companies also play a decisive and instigative role in this, through relocation of manufacturing and outsourcing. In addition to the U.S. companies, other actors involved are foreign invested companies (including Taiwan) and private labeled goods sourced by US companies.
First, let’s see some basic facts. The U.S. trade deficit with China was $375 billion in 2017; which exists because U.S. exports to China were only $130 billion while imports from China were $505 billion. In terms of contents, the United States imports consumer electronics, clothing and machinery from China. Of course, China can produce many consumer goods for lower costs than other countries can. Americans of course want these goods for the lowest prices. China keep prices so low because of the lower standard of living, which allows companies in China to pay lower wages to workers. Second, a lot of the imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports. Some other types of raw materials are those previously imported from, say, Africa to the US. But now a US company can directly shipped raw materials from Africa to China. This will be processed into intermediate stage and then export to the US. In addition to the cost factor, another reason is environmental standards. Low processing of mineral resources is generally polluting and thus banned in the US, EU or Japan.
As competition among US companies keeps hardening, the outsourcing of US manufacturing process to China continues. As a result, U.S. manufacturing jobs are lost. Naturally, to bring jobs back politicians resort to the idea of imposing tariffs or other forms of trade protectionism against China. As we can see, most US companies involved in outsourcing to China will resist the idea of imposing tariffs or protectionist measures. Also, if the US implements trade protectionism, U.S. consumers would have to pay high prices for their "Made in America" goods. More expensive “Made in America” goods may push the average price up in the US. This means higher export prices. This in turn means lower U.S. exports to China relative to the current levels. That's why it's unlikely that the trade deficit will significantly change. Again, this leave U.S. policymakers with the temptation to resort to tariffs or protectionist measure. Politically, it sells well but in reality those measures aren’t compatible with the global economies. Affecting U.S.-China bilateral trade is likely to harm some U.S. manufacturers relative to their EU counterparts as long as the latter keep outsourcing to China. Those EU competitors will likely grab those U.S. customers seeking cheaper “Made in China”. Then, U.S. policymakers have to also impose some forms of restrictions to EU products. See, president Trump has been mentioning German cars recently.

Understanding Donald Trump’s unconventional trade view on TPP. As we know it, the TPP involves the reduction or elimination of tariffs (a tax or duty to be paid on goods), new rules for resolving trade disputes (that gives more power to big firms to sue national governments), and the renegotiation of subsidies for the manufacturing and agricultural sectors. Throughout the US 2016 presidential campaign, Trump put forward his view opposing the TPP, saying that unfair trade deals would lead to the loss of American jobs and the decline of its manufacturing industry. Naturally, rejecting the TPP has been one pillars of his “make America great again” agenda.
Trump’s stance on trade is protectionist as he believes that the average American farmer and auto worker has lost out from the fact that labor is cheap in developing countries like China, Vietnam, or Thailand. The problem with Trump’s view is that low-skilled US jobs have been shipped to the above countries because of the very nature of the capitalist system, which requires profit-driven corporations to lower production costs as a mean of staying competitive. So, rather than seeing the job relocation as Asian countries stealing US jobs, it’s US corporations seeking low-cost Asia that triggers the trend. By the way, it is somewhat ideologically unconventional for a Republican president to reject anything resembling a cornerstone of capitalism. But then again, as I’ve tried to do in the past, convention is the last thing we can use when trying to understand Donald Trump.
Another angle of view. Trump saw TPP as a trade deal, when in reality its current chief designer, Barack Obama, designed it as an attempt to have America, rather than China, set the rules of trade in the Pacific region. Obama has tried to give some concessions to the other 11 partners in exchange for the hidden political commitment to stay under the US umbrella. But the merely economic perspective of Trump sees TPP as an unfair economic deal. As a result Trump plans to negotiate 11 separate bilateral trade deals with the former members of TPP. Obviously Trump believes by taking back some of the concessions already made by the Obama administration, the 11 partner countries will still be happy with new bilateral deals. Although I can’t see any rational to this, one way Trump can still get these 11 countries into bilateral deals that give them less than what they could get with the TPP is to pressure them either politically or militarily.
Even more troublesome from a negotiation point of view is the fact that the rest of the 11 TPP partners have the alternative of signing on trade deals with a resurgent China. As I facebooked it 3 days ago, China is now openly welcoming Asian Pacific countries to join its own trade agreement initiative. It's indeed a paradoxe, China is now elevated to the position of the defender of free trade while the Trump-led USA is moving toward protectionism.

Les récentes turbulentes que connaissent les bourses chinoises a réveillé les inquiétudes des investisseuses et suscité des questions sur l’état de santé réel de la deuxième économie mondiale. Pourtant, peu d'éléments confirment la thèse d'une dégradation spectaculaire des perspectives économiques de la Chine ces dernières semaines. Je suis de ceux qui suivent les tendances boursières de jour en jour; bien sûr pour des raisons de recherche plutôt qu’un intérêt d’investissement. Fort de mes observations, je crois qu’il y a plus de peur que de mal. Malgré mon avis sur la situation des bourses chinoises, un autre économiste plus expérimenté que moi et dont je partage pourtant la même doctrine économique, Paul Krugman, prix Nobel, pense autrement. Paul Krugman croit que les turbulences des marchés boursiers chinois en cours vont conduire la Chine vers le scenario qu’a connu le Japon dans les années 1990s et qui continue à maintenir l’archipel Nippon dans la morosité économique. Krugman poursuit en prédisant que les turbulences financières en Chine risquent d’affecter durement le reste du monde.
De leur côté, les autorités chinoises se battent pour gérer le cyclone de leur mieux; misant encore sur un taux de croissance au-dessus de 6.5% en 2016. Atteindre cet objectif suppose que les turbulences des marchés boursiers seront vite maitrisées et que les défauts de paiements resteront limites.
Au-delà de cette réalité économique et politique, il y a un problème théorique de fond qui me dérange. En effet, les autorités chinoises tentent de réussir l’impossible, et c’est dans une éternité. Ces autorités essaient de battre ce qui est connue en économie international comme le “triangle d’incompatibilité” (énoncé par Robert Mundell) C.à.d., un pays ne peut atteindre simultanément les trois objectifs suivants: (1) un régime de taux de change fixe, (2) une politique monétaire indépendante et (3) une intégration/ouverture financière parfaite. Même s’il quasi-certain, ce triangle d’incompatibilité est quasi-imbattable, il est frappant de voir comment les hommes politiques semblent croire au contraire. En ceci, le gouvernement du président Xi est en train de refaire la réaction (désormais maladroite) du Japon des années 1990s. Sauf que, les enjeux politiques en Chine ne sont pas comparables de ceux du Japon des années 1990s (c’est ici que mon analyse diverge de celle de Krugman) et la realpolitiks va vite ramener les autorités chinoises à la réalité. Car, le cout d’une crise financière majeure en chine sera politiquement lourd pour le régime et économiquement dure pour le reste du monde.

La croissance économique est loin d'être un miracle; elle est plutôt une conséquence inévitable qui se manifeste lorsque, dans des conditions d'incitation appropriées pour l'innovation, les gens essaient d'améliorer leur vie et celle des générations futures; lorsque les gens essaient de progresser par l'apprentissage, l'invention, l'épargne et l'accumulation du capital. Et surtout, lorsque les gens essayent de faire plus avec moins - grâce à la technologie ou les connaissances techniques.
Bien que la croissance économique a été pendant longtemps basée plus sur des mécanismes d'accumulation de "biens matériels" et moins sur l'amélioration de la technologie et des institutions (par exemple les droits sécurisés de propriété et les droits en général), la croissance économique dans le monde globalisé d'aujourd'hui est relativement plus dépendant de la création volontariste des connaissances et le progrès du cadre institutionnel. Cela est particulièrement vrai pour les pays en développement pour qui le climat des affaires, règles de concurrence et qualité du capital humain représentent encore des freins à la croissance économique soutenue et partagée.

Economic growth is not a miracle; it is what happens naturally when, under conditions of appropriate rewards for innovation, people try to improve their lives and those of future generations. They seek advancement by learning and inventing, saving and accumulating capital, and trying to do more with less--thanks to technology or technical knowledge.
While economic growth in the past might have been more accumulation of “stuff” and less improvement in technology and institutions (e.g. secure property rights and rights in general), economic growth in today's globalized world is relatively more dependent on knowledge creation and institutional progress. This is especially so for developing countries.

Greece remains a big topic of discussion as we (those living in Japan or East Asia) wake up this Tuesday morning. I keep a daily summary of the unfolding Greek crisis, so let’s me share the latest. The crisis is knocking down stock markets around the world with Nikkei (N225 in this picture) falling 2.08% and DAX 1.52% yesterday Monday. Meanwhile, Wall Street moved lower (with Dow Jones Industrial Average falling by 0.26%) while Shenzhen stock market also fell 2.7%. Following Sunday’s Greek NO vote, Greece’s Finance Minister Varoufakis resigned (and has since been replaced by Mr. Euclid Tsakalotos) in a bid to clear the air and restart negotiations but it remains to be seen if the other European leaders will positively react. Apparently Germany still isn’t interested in negotiating a compromise while the French president Francois Hollande would like to offer new options to Greece. These two leaders met yesterday Monday to accord their positions. Greece also extended capital controls to Wednesday amid questions about how much longer its banks can keep operating. In other key world markets, oil has its worst day in months as markets respond to the Greek vote.
Expect the disappointments to continue. What happens next largely depends on the action of the European Central Bank and whether it increases, holds steady, or cuts its liquidity support of the Greek banking system. Today, the ECB increased the haircut on collateral it accepts from Greek banks, moving them closer to insolvency. The next crucial deadline will be a $3.8 billion payment to the ECB on July 20. A default on this by Greece would likely force the central bank to pull back its liquidity support, deadline will be a $3.8 billion payment to the ECB on July 20. A default on this by Greece would likely force the central bank to pull back its liquidity support, force Greece to restore their own currency, the drachma.

Greek plus Puerto Rican debt crises: what is going on?
Stock markets around the world fell sharply yesterday Monday June 29 after a global sell-off as investors grew increasingly scared over the prospects of twin debt defaults by Greece and Puerto Rico. Yes, the U.S. territory, Puerto Rico is looking to renegotiate the terms of its $72 billion public debt as it reaches the brink of financial insolvency. As Germany/EU did in the case of Greece, the U.S. government is not planning a federal bailout for Puerto Rico.
Together, the pair of Greek & Puerto Rican debt crises exposed a new fragility in the global financial system; which has already been shaken by the
Grexit (aka Greek exit from the euro). The problem with Grexit has always been what we are seeing right now: the risk of financial chaos, which has already started with bank run in Greece. As a result, Greek banks have been shut down to avoid a meltdown. Meanwhile, bailout talks with European creditors are frozen. Greece does not have the money to pay $1.8 billion due to the IMF today Tuesday June 30, threatening default and withdrawal from the euro.

What is the Trans-Pacific Partnership, or TPP? Here is what I know. The TTP is a giant 12-nation trade agreement that would link 40% of the world's economy, including the United States, Japan, Australia, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, Canada, Mexico... The TPP is comprised of two main parts: (1) reductions in tariffs and (2) new rules for foreign direct investment (FDI) and intellectual property rights (IPRs). The details of the proposed agreement is... kept confidential (as it’s still under negotiation), although WikiLeaks has released some of the details. Based on what’s known so far, TPP has been controversial especially in USA and here in Japan. So many people feel uneasy with some parts of the proposed trade agreement. For instance, introducing an investor-state dispute settlement would favor foreign investors over domestic investors. This goes against the principle of equality before the law. Such a provision also is in a direct contradiction to the usual principles of FTAs we teach students (emphasizing non-discrimination across types of investors).
Naturally, critics of TPP are uneasy about the deal because of the secrecy surrounding the deal, because of the perceived losses in low-skilled jobs, agriculture sector... Particularly in Japan, TPP is also perceived as threatening Japanese public healthcare system. Other observers are seeing the proposed TPP as a collective move against China’s power. In contrast, officials in countries such Japan or USA see the TTP as unlocking opportunity for their leading industries.

African leaders have agreed to create the continent's largest free-trade zone, covering 26 countries. Known as the Tripartite Free Trade Area (TFTA) aims at bringing African intra-regional trade to 30% from its current 12% (the lowest in the world; e.g. EU has 70% intra-regional trade ratio).
While the TFTA is a logical move, the only problem is that African countries have been pursuing the same strategy over and over again since the 1960s. Of Africa’s 54 countries, 25 belong to two regional economic communities, 17 are a member of three, and six countries belong to four. The outcome has been the above-mentioned 12%.
If trade theory is any guide, David Ricardo explained that when 2 countries trade with one another, they focus their production efforts on the sorts of good that they have ‘comparative advantage’ in making. Looking at African current trade patterns, it’s obvious that countries’ specialization have been in “similar” primary commodities and agricultural goods. For the TFTA to make a difference and bring efficiency gains, countries should diversify their product profiles. Meaning that each countries should seek its own comparative advantage. This brings back the imperative for technology progress without which diversification won’t happen. Other crucial preconditions include the often mentioned infrastructure development and tariff reduction.
In short, while the creation of the TFTA for the promotion of intra-African trade is laudable, without effectively tackling obstacles such as lack of diversification, technology progress, tariff and infrastructures, this latest attempt will yield predictable outcomes. No need to be a prophet, anyone can predict such outcomes.

No matter what some experts think of the loose fiscal policy stance of the Abenomics, the fact is Japan doesn’t have any alternative policy tool for dealing with the country’s economic malaise. Boosting the economy through government bonds (JGBs) isn’t that bad. Worrying about huge debt ratio? This ratio has been mis-interpreted in the context of Japan. Here is my main argument. Net debt (Gross debt – financial assets) to GDP– its Net debt to GDP is still high (117%), but nowhere as high as the headline number. It’s twice that of USA 64% and Germany (57%). We can go one step further to look at the payment ability of Japan. The Net Interest Service as a % of GDP shows how much of Japan’s resources are used for servicing its debt. Dividing this number with the country’s tax burden gives a reasonable approximation of the strain of interest payments on the government. This ratio is around 4.3% for Japan, 5.4% for Germany and 6.3% for USA. So, Japan has to pay only 4.3% of its revenues to service its debt, lesser than what the USA and Germany have to. In sum, although Japan’s debt problem is real and must be dealt with, the problem is far from being near a catastrophe as painted in the media.
Let me also point out that Japan’s problem is still an excess of savings. Banks are packed with deposits that they need to place somewhere. For some time yet, the government will not find it hard to secure buyers for JGBs. Japan’s government, unlike Greece, doesn’t need to expose itself under foreign investors’ blackmail as its ultimate lenders are local savers. Meaning that no matter what Japan’s debt, still sustained via massive JGBs associated with Abenomics, is expected to boost Japan’s economy and will in the future be settled in Japanese households.