Winston Churchill’s maxim that ‘jaw-jaw is better than war-war’ also applies to economic issues. It is better to negotiate about finance issues and international trade than not to negotiate.
But don’t expect too much substance to emerge from President Hu Jintao’s current visit to Washington. Nor should U.S. farmers expect great things from a simultaneous Chinese farm trade delegation wending its way through the Midwest, even if some purchase agreements are signed with great flourishes.
In both cases, underlying self-interest rather than personal relationships will drive events. Changes in such underlying interests often are glacial and driven by domestic politics even if personality or diplomacy makes the headlines.
Several difficult economic issues divide China and the United States. China’s exchange rate policy far outweighs any other issue. The Chinese Central Bank continues to keep the value of the yuan lower relative to the dollar than it would if the exchange rate were left to pure market forces. This undervalued yuan makes U.S. exports more expensive to Chinese buyers and Chinese exports cheaper to U.S. buyers.
That renders imports like clothing and household goods cheaper for U.S. consumers but it simultaneously makes business harder for U.S. manufacturers of any item that might be exported to China and anything that must compete with imports from that country. This covers a host of firms, and U.S. employment in manufacturing consequently suffers from an undervalued yuan.
The flip side is that China’s manufacturing and employment level benefit to the detriment of Chinese consumers.
China’s authoritarian leaders may understand that, in time, they have to transition their economy toward achieving a higher level of production to meet the needs and wants of its own households rather than exporting goods. But, in the short run, they are much more concerned about social unrest that might stem from a sudden drop in exports caused by a brusque revaluation of the yuan.
With security forces already faced with myriad expressions of popular unrest — often related to the highly skewed costs and benefits of China’s extraordinary growth — and with its current lame duck leadership watching the calendar, don’t expect sudden changes of heart.
Moreover, the Chinese are correct that one can explain the imbalance in short-term flows between the two nations, largely in trade, as a direct result of an offsetting imbalance in capital flows in the other direction. That results from a low U.S. savings rate and perennial government budget deficits.
Finally, while China’s leadership does not like to trumpet the country’s growing inflation, they know that a rising price level in China, especially reflected in the wages of export manufacturing workers, has the same effects as a revaluation of the yuan. China’s 9 percent inflation and the 20 percent wage increases granted export manufacturing workers in the face of wildcat strikes a year ago have a much greater effect on relative competitiveness than changes in exchange rate policy.
In the meantime, a Chinese soybean buying delegation also arrived in Minnesota this week for meetings with counterpart organizations here before going on to Chicago, where it will sign a pre-announced purchase contract for billions of dollars of soybeans.
Any such contacts between government and business officials from the two nations can’t do any harm. But markets for farm products like soybeans, wheat and corn are about the most efficient and globally integrated in the world, due in large part to the expertise of traders like Bunge or Minnesota-based Cargill.
These products are an extreme example of fungible commodities that meet some standard specification. There is no brand identity and origin is inconsequential to the ultimate user.
In cases like this, what matters is total world consumption of soybeans. To the extent that rising Chinese use increases global consumption, that is good for all soybean producers — Brazilian as well as American, Minnesotan as well as Alabaman.
Exactly where the Chinese place their orders is of much less importance. Although state trade officials will look at Minnesota’s share of exports to China and proclaim its importance, that quantity of beans would not lie moldering in farm bins if China cut its imports. The beans would just sell for a lower price.
Rising Chinese imports of all sorts of agricultural and mineral commodities, including iron ore, have pushed up prices of these goods around the globe. That is good for Minnesota mining, even if few Minnesota taconite pellets ever go to China.
And 2011 promises to be a banner year for crop products benefiting not just farmers but also all sorts of farm-related businesses. But this expectation is driven by the underlying fundamentals of the Chinese economy, not platoons of smiling officials flattering each other over rubber chicken banquets.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.