Por la recesión, crece el proteccionismo

Varios países han lanzado en las últimas semanas medidas para defender sus economías y desalentar las compras en el exterior





Luisa Corradini
Corresponsal en Francia





PARIS.- La ola de proteccionismo que comienza a avanzar sobre el mundo como un tsunami amenaza con frenar el comercio y agudizar la recesión mundial.

Los subsidios, subvenciones, tarifas aduaneras y restricciones sanitarias adoptados en los últimos días por algunos países como Estados Unidos, Rusia, India, China, Indonesia, Francia y Brasil amenazan con paralizar el intercambio mundial y desencadenar una guerra comercial sin precedente desde la Gran Depresión.


Por primera vez después de 26 años de expansión, el comercio -que representa 6% del PBI mundial- experimentará un retroceso del 2,5% en 2009 por efecto conjunto de la crisis económica mundial y de las medidas proteccionistas adoptadas en los cinco continentes. Pero si se multiplican las barreras, el repliegue podría llegar al 7,7%, según Antoine Bouet y David Laborde, del International Food Policy Research, de Washington.


"Cada uno por su lado representa una peligrosa tendencia", advirtió Jim O´Neill, de Goldman Sachs.


La actual tendencia, aparentemente imposible de contener, pulverizó una de las promesas formuladas por los líderes mundiales en la cumbre del G-20 celebrada hace un mes en Washington. El grupo también se había comprometido a concluir antes de fin de año la Ronda de Doha destinada a liberalizar el intercambio.


Pero la resurrección del proteccionismo obligó al director general de la Organización Mundial de Comercio (OMC), Pascal Lamy, a aplazar sine die ese acuerdo. Las tentaciones proteccionistas pueden marcar el final de un período de liberalización que permitió reducir las tarifas aduaneras de 26% en 1986 a 8,8% en 2007.


El presidente francés, Nicolas Sarkozy, en visita oficial a Brasil, apeló ayer a su par Luiz Inacio Lula da Silva a luchar contra esa peligrosa tendencia: "No se puede postergar la liberalización del comercio", proclamó. Pero pocos días antes de subir al avión creó un fondo de US$ 7600 millones para proteger la industria de su país de los "depredadores extranjeros". "Europa podría transformarse en un desierto si no hacemos nada para defender sus industrias", afirmó unos días después en Bruselas.


Los dirigentes se rasgan las vestiduras proclamando su buena fe. "En situaciones de crisis, siempre existe el riesgo de proteccionismo", afirmó el presidente de la Comisión Europea, José Manuel Durão Barroso, que no podía mostrar sus manos limpias. Días antes había bloqueado el ingreso de pavo norteamericano en Europa.


La Unión Europea también postergó un acuerdo de libre comercio que debía firmar con los países del Golfo.


En tanto, Pekín rechazó las acusaciones de Estados Unidos y México después de que desgravó 3700 productos, que representan el 28% de sus exportaciones. "Nuestro país siempre respetó las reglas de la OMC", afirmó el Ministerio de Comercio.

Rusia, por su parte, aumentó los gravámenes para la importación de automóviles; India disminuyó las cuotas para las importaciones de acero y mineral de hierro; Indonesia adoptó restricciones para más de 500 productos importados, y Brasil estudia aplicar gravámenes a un grupo que va desde pieles hasta duraznos.

Incluso el préstamo de US$ 17.400 millones acordado por el presidente George W. Bush para sacar del coma la industria automotriz de Estados Unidos equivale a una "subvención discriminatoria" contra los fabricantes extranjeros, según los analistas.


El actual escenario inquieta a los expertos, que temen encontrarse ante un remake de la situación que se produjo en junio de 1930. Apenas nueve meses después del crack bursátil de Wall Street, el representante W. C. Hawley y el senador Reed Smoot, ambos republicanos, hicieron votar una ley que aumentaba a niveles sin precedente las tarifas aduaneras de unos 20.000 productos importados. La medida bloqueó la recuperación norteamericana, agravó la recesión mundial y desencadenó una guerra comercial que provocó la caída del comercio del 65% entre 1930 y 1934.


Las nefastas consecuencias que tuvo la ley Hawley-Smoot inspiraron, en gran medida, los acuerdos de Bretton-Woods en 1944, que formularon las primeras recomendaciones de liberalización comercial. Esa misión fue proseguida a partir de los años 50 por el Acuerdo General de Tarifas y Comercio (GATT, por sus siglas en inglés) y más tarde por la OMC.


Gracias a la progresiva eliminación de obstáculos, el comercio global pasó de unos US$ 59.000 millones en 1948 a unos US$ 11,8 billones en 2006, y la OMC se ilusionaba con llegar a 27 billones en 2030. Ahora, la situación puede involucionar. Ese riesgo aumenta a medida que los principales actores del comercio mundial, como ocurría en la Edad Media, construyen fortalezas invisibles en sus fronteras para impedir el libre tránsito de los mercaderes.





Los planes


* La India: ante la caída de los precios internacionales de los alimentos, el gobierno subió 20% los impuestos sobre el aceite de soja para defender a sus productores agropecuarios.

* Rusia: con el mercado de autos más grande de Europa, Moscú aumentó los impuestos al ingreso de autos extranjeros en hasta el 35%. Para proteger a sus granjeros, el Kremlin subió las tarifas a algunos productos agropecuarios comprados a Estados Unidos.

* Indonesia: el país del sudeste asiático impuso restricciones a por lo menos 500 productos, demandando licencias especiales y nuevos cánones a las importaciones.

* Francia: lanzó un fondo estatal para proteger a las empresas locales de compradores extranjeros.

* Brasil: analiza subir las tarifas de vinos, textiles, cueros y duraznos, entre otros productos importados.

El fantasma del proteccionismo acosa a la administración Obama

22/12/2008




La política comercial de la futura administración Obama seguramente ponga el acento en el medio ambiente y los derechos sociales, temas que también podrían servir de pretexto a medidas proteccionistas, en una coyuntura en la que Estados Unidos se hunde en la recesión.

"El nuevo presidente estará sometido a presiones proteccionistas mayores que las que haya experimentado cualquiera de sus predecesores después de 1930", prevé el subsecretario de Comercio saliente, Christopher Padilla. "La manera como maneje esta presión determinará la evolución de la economía mundial, así como el carácter de la economía estadounidense durante un cuarto de siglo".

La futura administración probablemente sea comercialmente más dura que el equipo de George W. Bush, quien en ocho años firmó acuerdos de libre comercio con 11 países.

Durante su campaña electoral, Barack Obama prometió que renegociaría el Acuerdo de Libre Comercio de Norte América (TLCAN) con México y Canadá, uno de los grandes objetivos de los sindicatos estadounidenses que apoyaron su candidatura.

También prometió revisar el acuerdo de libre comercio con Corea del Sur con el objetivo de obtener concesiones adicionales de Seúl sobre la importación de automóviles estadounidenses. Este acuerdo, al igual que acuerdos similares firmados con Colombia y Panamá, agonizan en el Congreso ante la oposición de la mayoría demócrata.

Al presentar el viernes en Chicago a su representante de Comercio, Ron Kirk, Obama le dio la misión de "asegurar que todos nuestros acuerdos comerciales sean firmados en base a la reciprocidad".

Ello significa que los socios de Washington se comprometen en compromisos "mandatorios en el plano de las normas sociales y ecológicas a fin de evitar que se iguale hacia abajo y obtener por el contrario una mejoría del nivel de vida para todos los trabajadores", explicó el presidente electo, que asumirá funciones el 20 de enero.

Ron Kirk, que es visto como integrante de la tendencia librecambista en el seno del Partido Demócrata, también tendrá a su cargo enfrentar el desafío de China, origen del mayor déficit comercial estadounidense. Obama ha criticado en el pasado la subvaluación del yuan, la divisa china, acusada de favorecer injustamente las exportaciones de Pekín.

Sin embargo, China acaba de dejar caer levemente la cotización de su divisa, después de haber permitido durante tres años un alza progresiva del yuan frente al dólar.

Sin esperar la entrada en funciones del equipo de Obama, la administración saliente presentó una demanda la semana pasada ante la Organización Mundial de Comercio (OMC) contra China, acusándolo de sostener indebidamente la exportación de sus productos de marca.

Obama apoyará las negociaciones en la OMC para lograr un acuerdo mundial para bajar las barreras aduaneras (Ronda de Doha), según sus asesores.

Pero cualquier acuerdo que se logre en el marco de esas negociaciones, que ya llevan cuatro años de atraso, deberá ser eventualmente ratificado por el Congreso, donde la mayoría demócrata podría ser crecientemente dura, si se incrementan los cierres de fábricas en Estados Unidos, como consecuencia de la recesión.

La National Association of Manufacturers (NAM), una de las mayores asociaciones de empresarios industriales del país, se alegró por la designación de Kirk, quien tendrá la responsabilidad de representar a Washington en esas negociaciones iniciadas en 2001.

"El hecho de que sea una persona cercana al presidente electo muestra que nuestro compromiso nacional en favor del comercio internacional se mantiene fuerte", declaró el presidente de la NAM, John Engler.

Should we fear a trade backlash?


Economic aspects of the 1930s many of us thought we would never see in our lifetime have reared their ugly heads again






With more than a whiff of depression in the air, is a Smoot-Hawley-like backlash against trade about to follow? It was the collapse of GNP in 1929-30 that led the US Congress to impose the tariff that caused the unravelling of world trade. Might the same happen again?


The danger exists. If the past months have taught us one thing, it is that anything is possible. Other economic aspects of the 1930s that many of us thought we would never see in our lifetimes have reared their ugly heads. Google News listed 181 articles mentioning "Smoot Hawley" this week.


Some of these fears relate to the protectionist rhetoric of Barack Obama during the Ohio primary and his opposition to the Colombian and South Korean free trade agreements. Then there are the bailouts for General Motors and Chrysler. A subsidy for domestic auto producers is fun.ctionally equivalent to a tax on the US sales of foreign producers. Finally there is the fear that the US fiscal stimulus package about to be adopted will be rendered less effective if the increased demand is allowed to leak out in the form of increased imports. US politicians will be quick to react with protectionist measures if they see that today's spending programmes, which create a debt burden for future generations, fail to stimulate the American economy and only benefit other countries.


Fortunately there are reasons for thinking that this danger is overstated. First, the growth of multinational production and global supply chains has altered the political economy. Protecting US auto producers no longer automatically benefits US parts suppliers when the Big Three source many of their parts from Canada. Foreign companies with an interest in the maintenance of free and open trade are better represented in the political process than they were in the 1930s. We saw this in the debate over the auto bailout when the "Senator from Honda", Richard Shelby, argued against the provision of federal funds.


Second, in 1930 Congress resorted to Smoot-Hawley out of desperation over its lack of alternatives. It was not that the Congress then, as some suggest might be the case now, resorted to a tariff to maximise the employment-creating impact from expansionary fiscal policies. Rather the tariff was imposed instead of expansionary fiscal policies, there as yet being no understanding of the case for fiscal stimulus.
The danger of a tariff as a convoluted employment-creating policy is now less, precisely because we understand that there are direct ways for the government to stimulate demand, namely by cutting taxes and raising public spending.


Finally, if fiscal stimulus and the Fed's zero interest rate policy mainly suck in imports, then the dollar will decline in response to the widening current account deficit. This will shift demand back toward domestic goods, venting the pressure for a protectionist response. This is no mere hypothetical: we have already seen the dollar falling in anticipation of just these developments. This is fundamentally different from 1930, when the US and other countries were on the gold standard and there was no scope for the exchange rate to adjust.



This suggests that a better analogy than Smoot-Hawley is the British General Tariff of 1932, imposed after the UK abandoned the gold standard. Sterling had already depreciated substantially, raising the prices of imports relative to British goods and rendering the tariff redundant. With sterling floating, the decline in imports induced by the tariff just put upward pressure on the exchange rate, neutralising most of the change in relative prices. As a result, the employment-creating effects of the tariff were somewhere between minimal and non-existent. This has been well known since a Yale University dissertation was written on this particular series of events 30 years ago. (No bonus points for guessing the identity of the author.)


If the General Tariff had been rendered redundant, then why was it imposed? The simple answer is that, with unemployment rates of 20 per cent, British politicians were desperate to do something, and they had few other instruments at their disposal. To be sure, there was "cheap money" – the 1930s equivalent of today's zero-interest-rate policy. But there was no certainty that this would work, just as there are questions today about whether, with banks reluctant to lend, the Fed is simply pushing on a string. And, as already noted, there was no understanding of the role for fiscal policy.





Today, in contrast to the 1930s, our politicians have no shortage of policy levers. They just need to pull the right ones.

Protectionism
The battle of Smoot-Hawley

Dec 18th 2008
From The Economist print edition

Hawley and Smoot, the bogeymen of trade

A cautionary tale about how a protectionist measure opposed by all right-thinking people was passed






EVEN when desperate, Wall Street bankers are not given to grovelling. But in June 1930 Thomas Lamont, a partner at J.P. Morgan, came close. “I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff,” he recalled. “That Act intensified nationalism all over the world.”


According to David Kennedy, an historian, Lamont was “usually an influential economic adviser” to the American president. Not this time. Hoover signed the bill on June 17th: “the tragic-comic finale”, said that week’s Economist, “to one of the most amazing chapters in world tariff history…one that Protectionist enthusiasts the world over would do well to study.”



The Tariff Act of 1930, which increased nearly 900 American import duties, was debated, passed and signed as the world was tumbling into the Depression. Its sponsors—Willis Hawley, a congressman from Oregon, and Reed Smoot, a senator from Utah—have come to personify the economic isolationism of the era. Sixty-three years later, in a television debate on the North American Free-Trade Agreement, Al Gore, then vice-president, even presented his unamused anti-NAFTA opponent, Ross Perot, with a framed photograph of the pair. Now, with the world economy in perhaps its worst pickle since the Depression, the names of Hawley and Smoot are cropping up again.


In fact, few economists think the Smoot-Hawley tariff (as it is most often known) was one of the principal causes of the Depression. Worse mistakes were made, largely out of a misplaced faith in the gold standard and balanced budgets. America’s tariffs were already high, and some other countries were already increasing their own.


Nevertheless, the act added poison to the emptying well of global trade (see chart). The worldwide protection of the 1930s took decades to dismantle. And bad monetary and fiscal policies were at least based on the economic orthodoxy of the day: economists would tear each other apart over the heresies of John Maynard Keynes. On protection, there was no such division. More than a thousand economists petitioned Hoover not to sign the Smoot-Hawley bill. Bankers like Lamont sided with them; so did editorialists by the score.

The “asinine” bill began as a much smaller beast: the plan was to help American agriculture, which had slumped in the early 1920s. Congress passed several bills to support prices and subsidise exports, but all were vetoed by Calvin Coolidge, Hoover’s predecessor. With no obvious logic—most American farmers faced little competition from imports—attention shifted to securing for agriculture the same sort of protection as for manufacturing, where tariffs were on average twice as high. To many of its supporters, “tariff equality” meant reducing industrial duties as well as raising those on farm goods. “But so soon as ever the tariff schedules were cast into the melting-pot of revision,” this newspaper wrote, “logrollers and politicians set to work stirring with all their might.”


Start rolling


In the 1928 election campaign Hoover and his fellow Republicans promised to revise the tariff. The Democrats, then the freer-trading party, were unusually acquiescent. After comfortable Republican wins in November, Hawley, the chairman of the House Ways and Means Committee, set to work. By the time Hoover was inaugurated in March 1929 and called a special session of Congress to tackle the tariff, his committee had gathered 43 days’, five nights’ and 11,000 pages’ worth of testimony. The door was open to more than just farmers; Hawley’s committee heard mainly from small and medium-sized industrial businesses.



The House bill, passed in May, raised 845 tariff rates and cut 82. Douglas Irwin, an economist at Dartmouth and author of a forthcoming book (“The Battle over Protection: A History of US Trade Policy”) on which this article draws heavily, says it “tilted the tariff nearly as much toward higher duties on manufactured goods as it increased duties on agricultural imports.”


The bill then went to the Senate, where Smoot chaired the Finance Committee. Senators who thought their constituents had lost out in the House—from farming and mining states—were spoiling for a fight. Smoot’s committee increased 177 rates from the House version and cut 254. In the next committee stage—which lasted from the autumn of 1929 until March 1930—the whole Senate could take part. Farming- and mining-state senators pruned Hawley’s increases in industrial tariffs.


In the last Senate stage, senators from industrial states regrouped, fortified by the gathering economic gloom. “A different voting coalition emerged,” says Mr Irwin, “not one based on agricultural versus industrial interests but on classic vote-trading among unrelated goods.” Some senators disapproved: Robert LaFollette, a Republican from Wisconsin, called the bill “the product of a series of deals, conceived in secret, but executed in public with a brazen effrontery that is without parallel in the annals of the Senate.”


Others saw nothing wrong. Charles Waterman, a Republican from Colorado, declared: “I have stated…that, by the eternal, I will not vote for a tariff upon the products of another state if the senators from that state vote against protecting the industries of my state.” The tariff’s critics—including Franklin Roosevelt, in his presidential campaign in 1932—dubbed the bill the “Grundy tariff”, after Joseph Grundy, a Republican senator from Pennsylvania and president of the Pennsylvania Manufacturers’ Association. Grundy had said that anyone who made campaign contributions was entitled to higher tariffs in return.


The Senate’s final bill contained no fewer than 1,253 changes from the House’s version. The two houses compromised, broadly by moving the Senate’s rates up rather than the House’s down. In all, 890 tariffs were increased, compared with the previous Tariff Act, of 1922, which had itself raised duties dramatically (for examples, see table); 235 were cut. The bill squeezed through the Senate, by 44 votes to 42, and breezed through the House.

Of all the calls on Hoover not to sign the bill, perhaps the weightiest was a petition signed by 1,028 American economists. A dozen years later Frank Fetter, one of the organisers, recalled their unanimity. “Economic faculties that within a few years were to be split wide open on monetary policy, deficit finance, and the problem of big business, were practically at one in their belief that the Hawley-Smoot bill was an iniquitous piece of legislation.”


Some of the names are familiar even now. One was Frank Taussig, a former head of the Tariff Commission (which advised on whether duties should be raised or lowered). Another was Paul Douglas, later a senator (undergraduates are still introduced to the Cobb-Douglas production fun.ction). And a third was Irving Fisher.


Fisher is still a giant of economics, best known for his work on monetary theory and index numbers. (He was fallible, though. Shortly before the 1929 stockmarket crash, he declared, “Stock prices have reached what looks like a permanently high plateau.”) According to Fetter, Fisher suggested that the petition refer explicitly to the importance of trade to America as a huge creditor nation: if other countries could not sell to the United States, how could they repay their debts? It was also thanks to Fisher that so many economists signed it. He proposed that it be sent to the entire membership of the American Economic Association, rather than to one member of each university’s faculty, and offered to meet the extra expense. The total cost was $137, of which Fisher paid $105.


Expensive ink


Hoover’s signature cost rather more—even though the direct effect on American trade was limited. The average rate on dutiable goods rose from 40% to 48%, implying a price increase of only 6%. And most trade, Mr Irwin points out, was free of duty (partly because high tariffs discouraged imports). He estimates that the new tariff reduced dutiable imports by 17-20% and the total by 4-6%. Yet the volume of American imports had already dropped by 15% in the year before the act was passed. It would fall by a further 40% in a little more than two years.


Other, bigger forces were at work. Chief among these was the fall in American GDP, the causes of which went far beyond protection. The other was deflation, which amplified the effects of the existing tariff and the Smoot-Hawley increases. In those days most tariffs were levied on the volume of imports (so many cents per pound, say) rather than value. So as deflation took hold after 1929, effective tariff rates climbed, discouraging imports. By 1932, the average American tariff on dutiable imports was 59.1%; only once before, in 1830, had it been higher. Mr Irwin reckons that the Tariff Act raised duties by 20%; deflation accounted for half as much again.


Smoot-Hawley did most harm by souring trade relations with other countries. The League of Nations, of which America was not a member, had talked of a “tariff truce”; the Tariff Act helped to undermine that idea. By September 1929 the Hoover administration had already noted protests from 23 trading partners at the prospect of higher tariffs. But the threat of retaliation was ignored: America’s tariffs were America’s business. The Congressional Record, notes Mr Irwin, contains 20 pages of debate on the duty on tomatoes but very little on the reaction from abroad.


A study by Judith McDonald, Anthony Patrick O’Brien and Colleen Callahan* examines the response of Canada, America’s biggest trading partner. When Hoover was elected president, the Canadian prime minister, Mackenzie King, wrote in his diary that his victory would lead to “border warfare”. King, who had cut tariffs in the early 1920s, warned the Americans that retaliation might follow. In May 1930, with higher American tariffs all but certain, he imposed extra duties on some American goods—and cut tariffs on imports from the rest of the British empire.

He promptly called a general election, believing he had done enough to satisfy Canadians’ resentment. America, wrote the New York Times, was “consciously giving Canada inducements to turn to England for the goods which she has been buying from the United States.” Canadians agreed. King’s Liberals were crushed by the Conservatives, who favoured and enacted even higher tariffs.


All this, of course, is history. There are plenty of reasons to think that the terrible lesson of the 1930s will not have to be learnt again. Governments have reaffirmed their commitment to open trade and the World Trade Organisation (WTO). The complex patterns of cross-border commerce, with myriad stages of production spread over so many countries, would be enormously costly to pull apart.


And yet. Tariffs can be increased, even under the WTO. The use of anti-dumping is on the rise. Favours offered to one industry (farming then; cars now?) can be hard to refuse to others. And the fact that politicians know something to be madness does not stop them doing it. They were told in 1930: 1,028 times over.





* “Trade Wars: Canada’s Reaction to the Smoot-Hawley Tariff”. Journal of Economic History, December 1997.

It's hard to argue the merits of Smoot-Hawley in today's economic environment because the general consensus is "S-H bad, period." Often, economists are university theorists who seem unable to understand that we live in a POLITICAL world.

In the 20's the US funded much of it's overseas trade just as China did from 2000 to 2007. When liquidity dried up, the US attempted to hold onto the value of it's manufacturing by limiting imports. I suspect that unless our country is run by college professors with dictatorial powers this will happen again.

China is doing the same thing now. It's first fixing prices, by limiting farm export licenses. It's "helping" domestic farmers by setting up a crop reserve, which will help increase yuan grain prices and ease the transition of millions of people leaving the cities for their old lives back on the farms. It's using infrastructure projects, including 5 bullet trains, to hire excess workers. Sound familiar?

Rather than judging this to be right or wrong I would judge it to be natural, predictable and inevitable. China's goal, as it has been for 2,000 years is stability. In the US, 90% of economists are in complete agreement as to the solution to this problem, a situation I find terrifying.

As to the conclusion to the effects of Smoot Hawley, I have no clue other than to say Naill Ferguson said it had a minimal effect on the US.

Depression, PMI and China


by: Edward Hugh January 02, 2009 | about stocks




The second Great Depression wends its way forward in December ... and lands in China.

Well, China isn't quite in Great Depression mode yet, but manufacturing activity - which forms the core of the Chinese economy and accounts for 43% of all activity - is already very close to a technical recession, and phew, it wasn't very long ago that the Chinese economy was registering double digit growth. So the turnaround is gigantic. The "close to technical recession in manufacturing industry" call comes from the people over at CLSA Asia-Pacific Markets, who compile the China purchasing managers index, and they base their judgment on the fact that their Chinese manufacturing index has now been registering contraction for five consecutive months.




Now for those of you who are new to the world of Purchasing Manager's Indexes (PMIs), welcome. Basically these indexes are very useful, since they give you a "just in time" point of reference to tell you what is actually happening. These are composite indexes - measuring things like current output, new orders (both domestic and export), employment and input prices. They are not perfect, but they are reasonably accurate - the fit which you can get between composite PMIs (manufacturing and services combined) and GDP is often attractively good. And in a country like China where the main data we get is year-on-year (which in a critical moment of rapid change like this one is virtually useless) it is very hard to see what is happening.

The Shanghai-based Industrial Bank estimates, for example, that GDP growth in China will be 5.6% in Q4 2008. But what does that data point - if accurate - tell us? That the economy is slowing fast - well, we already knew that. But just how fast? Well, GDP was 9% in Q3 - down from 10.1% in Q2. So the deceleration is very rapid, but did the Chinese economy actually manage to contract in Q4? I doubt it, but it may do in Q1 2009, although the only way we would really know would be if the National Statistics Office published quarter-on-quarter seasonally adjusted numbers, which as far as I can see they don't. Indeed only a small group of highly developed economies actually take the trouble to do this, and you don't even find all EU member countries doing it yet, although Eurostat (thank god for Eurostat) does require such data from members (but those of you who ever get round to checking will see there are still blanks for some countries in the Eurostat quarterly releases).

Hence you can see why, in the case of somewhere like China, the PMIs are very, very useful, for those of us who would like to try and follow what is happening as it actually happens.

As for the PMI itself, China’s composite manufacturing index contracted for the fifth consecutive month in December as recessions in the U.S., Europe and Japan bit deep into demand for exports - indeed China's exports fell year on year for the first time in seven years in November. The CLSA China Purchasing Managers’ Index registered a seasonally adjusted 41.2, compared with a record low of 40.9 in November. On such indexes any reading below 50 reflects a contraction.

Despite the apparent small improvement in December, the current output index actually fell sharply, and was down to a record low of 38.6 from 39.2 in November, so production was falling, and the index was basically nudged up slightly by other factors, such as the measure of new orders which rebounded to 37 from 36.1, driven by a rise in export orders to 33.6 from a horrific 28.2 in November. However, according to the report, Chinese manufacturers reduced the size of their workforces at a series record in December, and the employment index has now contracted for five consecutive months, to hit 45.2 in December.



So where exactly are we? Well, we aren't (quite) in the Second Great Depression yet, but the situation is deteriorating, and rapidly. Manufacturing output is now contracting at quite a sharp pace, while it was rising in the first half of the year at something like a 15% year on year rate. In a useful summary of the Chinese situation back in November, Nouriel Roubini defined a hard landing in China - which he felt was coming - as follows:




There is thus now a growing risk of a hard landing in China. Let us be clear what we mean by hard landing. In a country with the potential growth of China, a hard landing would occur if the growth rate of the economy were to slow down to 5-6% as China needs a growth rate of 9-10% to absorb about 24 million folks joining the labor force every year; it needs a growth rate of 9-10% to move every year about 12-14 million poor rural farmers to the modern industrial/manufacturing urban sector.



This is more or less the consensus view of what we used to think a hard landing would mean in China, but I think the latest data already take us beyond that. I think there is now a real risk of a technical recession in the more or less classic sense of two consecutive quarters of negative growth (let's say that the risk is 50-50 at this point), and of serious economic and financial dislocation following in the train of this (btw, just how quickly can you burn your way through $1.7 trillion in reserves? It will be an interesting experiment, I think).

Brad Setser (further down the same link) has long been more cautious on China, being sceptical about the impact of a dramatic slowdown in exports (and even more importantly in export oriented investment) on an export driven economy, but those of us who have been closely watching other export dependent economies like Germany and Japan over the last decade and a half were surely not quite so sceptical. However even Brad himself is clear that the possibility of an export downturn feeding its way back into the domestic economy - via some sort of negative feedback process - is real enough:

But the real key to forecasting China’s future growth consequently is determining whether domestic consumption and above all investment will continue to grow strongly in the absence of strong export demand. Remember, over the past few years both domestic investment and exports increased rapidly. If they fall together as well, Chinese growth will slow quite significantly. And unfortunately the latest indicators seem to suggest that they are correlated; consequently domestic demand may fall along with exports.

The $1.7 trillion question is, then, just why China is so export dependent? Doubtless there are many factors at work, but one of these is, I am almost sure, China's very special demographics (30 years of one child per familiy policy), and the special problems that these present in the context of building a sustainable national pensions system at the same time as the population pyramid inverts. Obviously the absence of a credible pension system has to be one of the factors influencing the strong desire to save which we are seeing in China. Economics Nobel Franco Modigliani also thought this, and specifically addressed the Chinese saving puzzle in his last published paper:



China's per capita income ranks below 100th in the world. Its saving rate, however, has been one of the highest worldwide in recent decades. In this paper, we attempt to explain the seeming paradox within the framework of the Life-Cycle Hypothesis developed by Franco Modigliani. The key LCH variables are income and population growth. Our results based on data we put together from official sources show that income growth has been the dominant factor behind the dramatic increase in China's saving rate, as predicted by the LCH. Demographic structure and inflation also had significant impact on the fluctuations of the saving rate.
The Chinese Saving Puzzle and the Life-Cycle Hypothesis - Franco Modigliani and Shi Larry Cao



By Way Of Brief Conclusion


Well basically, the conclusion here is that there is no conclusion, at this point at least. But I would draw attention to two potential points of interest for all you "economy watchers".



Well basically, the conclusion here is that there is no conclusion, at this point at least. But I would draw attention to two potential points of interest for all you "economy watchers".

Firstly, a couple of months back my fellow blogger Doug Muir

drew our attention

to a very interesting point being made

by US economic historian Scott Reynolds Nelson


As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.

At the time of reading this I thought to myself hmmmm! This isn't that simple, but he is on to something. Basically I think no two (or does that make it now three) Great Depressions are ever really exactly alike. I certainly think the resemblence between what is going on now and what happened between 1929 and 1933 is more than passing (especially for the sequencing, of which more in another post), but evidently there are elements of the 1873 one too, and Scott Reynolds puts his finger on some of them, especially in the context of surplus to requirement investment and large capacity overhangs. So my best guess is that what we have is a hybrid, and that what is now happening in China is the best example of the underlying dynamics behind that other great depression that hit our grand- (or great grand) parents and that may well be now about to come back to hit us, boomerang style.

Which brings me to my second point, the Smoot-Hawley Tariff Act, which,


as wikipedia explain


, was signed into law on June 17, 1930, and raised U.S. tariffs on over 20,000 imported goods to record levels. After the act was passed, many other countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half. Many economists now regard the Smoot-Hawley Act as having been the principal feedback catalyst for the severe reduction in U.S.-European trade, and which took it from the 1929 high down to the depressed levels of 1932 and which thus accompanied the start of the Great Depression. And here, in the spectre of a repeat performance comes just the danger we face in the wake of the dramatic contraction which is now underway in China.

It is my personal guess that the first major issue to face Barack Obama as President of the United States may well be what to do about China, and especially what to do about a China which lets - as I now suspect they may well do - the yuan float, in order to see it

float DOWN

as the economy unwinds. If this does indeed happen then Obama will really have to struggle to hold back the protectionist pressure I think.

January 4, 2009, 3:07 am
Another Stimulus Idea: End Protectionism?
By Catherine Rampell






With less than three weeks before Barack Obama is sworn in as president, the demands for a fiscal stimulus package are mounting. Fiscal stimulus can take the form of additional government spending or tax cuts. While you have probably already heard calls for reductions to personal and corporate income taxes, here is one tax-related stimulus suggestion that you may not have come across: eliminating tariffs, the taxes on imports to the United States.

Typically an economic downturn seems to stoke protectionist impulses in many Americans, but Mark J. Perry, an economics professor at the University of Michigan, Flint, argues that cutting tariffs would create jobs:

Tariffs are usually used to protect domestic industries from more efficient foreign competitors. But domestic firms also buy inputs, raw materials, supplies, parts and inventory FROM foreign producers, and in fact more than half of U.S. imports are industrial supplies and parts, and NOT finished consumer goods. In that case, tariffs are a tax on the inputs of domestic businesses and can put them at a significant competitive disadvantage.

He cites an example of a tariff on a certain type of fabric used by furniture manufacturers in Mississippi. The removal of the tariff is estimated to save “950 cut-and-sew jobs” at companies in Northeast Mississippi, according to an editorial in the Northeast Mississippi Daily Journal.

Finally, if fiscal stimulus and the Fed's zero interest rate policy mainly suck in imports, then the dollar will decline in response to the widening current account deficit. This will shift demand back toward domestic goods, venting the pressure for a protectionist response. This is no mere hypothetical: we have already seen the dollar falling in anticipation of just these developments.

It's hard to argue the merits of Smoot-Hawley in today's economic environment because the general consensus is "S-H bad, period." Often, economists are university theorists who seem unable to understand that we live in a POLITICAL world.