Thursday, August 4, 2005
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Trade, China, and steel
The Chicago Tribune has two articles in its business section on trade with China -- both of which show that all is not what it seems when you analyze a bilateral economic relationship between two large countries.
Of course, as the story goes on, things get a bit more complicated:
In a sidebar, Michael Oneal looks at how U.S. firms across the board will react to a further devaluation of the yuan. Turns out there won't be much of areaction:
posted by Dan on 08.04.05 at 11:21 AM
The thing that the good people at Cummins do not seem to realize is that the next stage of Chinese development is to move upstream and become competitors to firms like Cummins that manufacture more sophisticated equipment.
But of course they are right that currency moves are still unlikely to change this.posted by: spencer on 08.04.05 at 11:21 AM [permalink]
Dan -- I can not quite figure out where you stand on this. if you think the trade deficit is a problem b/c it implies ever larger external debts for the US over time, and at some point adjustment has to happen, then the absence of a greater response to exchange rate moves is bad news. it either implies the change in the currency has to be very big indeed (to shift the location of a decent share of the electronics plants Littlefuse supplies out of China to the US) or adjustment can only come from a very sharp fall in US domestic demand that reduces demand for imports (and everything else as well). I would expect free traders to prefer exchange rate adjustment to other possible means of adjustment (remember, China's exports to the world and to the US are growing at 30% y/y and have been growing at that rate ever since 2002, and something necessarily will come along to slow that pace of growth). To me the best outcome is exchange rate adjustment and a strong trade response to it -- and if the trade response is small, that just increases the size of the needed adjustment.
Nucor may not be acting quite as irrationally as you suggest; there has been a big turnaround in "steel" this year. China was importing all kinds of steel like mad in 03/04. But a bunch of production came on line and it is now exporting non-speciality commodity steel (largely inside Asia). That is one reason why Chinese import growth has slowed so much (see Jonathan Anderson of UBS for details) -- the pattern of trade in chemicals and steel has changed as a result of increased capacity and a slowdown in china's real estate boom.
Iron ore producers still win -- China needs more iron ore no matter what - but bulk steel producers are facing more competition, tho certainly that competition does not just come from China. And it is fair to assume that China -- investing 50% of its GDP a year -- is investing in speciality steel production as well.
At some point tho, the trade will have to change from Chinese goods for US debt to Chinese goods for US goods, and that shift probably implies some shift in relative prices, and the more responsive trade is to the moves in price, the smaller the needed move -- so at least am hoping these anecdotes are off, and trade is more responsive to exchange rate moves. (the data suggests a declining responsiveness globally -- see the imf, which strikes me as trouble ... )
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