Category Archives: Economic

China, Economic, Foreign Affairs, Japan, Society, United States

A bilateral trade agreement between Japan and America looms…

TRADE AGREEMENT

Intro: But why is this potential agreement being treated as a weapon? It shouldn’t be used to contain China

Congressional leaders in America rarely agree on anything, but last week some good news stemmed from Washington. A bipartisan bill has been presented to Congress which, if passed, would for the first time in many years give the president ‘fast-track’ authority when negotiating trade deals. A huge trade deal looms, the Trans-Pacific Partnership (TPP), and the bill would provide a major boost for its prospects. It would bind America with 11 economies (including Japan but not China) around the Pacific Rim. The TPP is being mightily embraced. As Japan’s Prime Minister, Shinzo Abe, heads to Washington for a much anticipated trip – including an invitation to address a joint session of Congress – Mr Abe claimed that America and Japan were close to agreeing the terms of a bilateral agreement on trade.

However, there are two major caveats. First, ‘fast track’, formerly known as Trade Promotion Authority, may still fall foul of Congress. And second, Japan may not make any serious cuts to tariffs that protect its farmers. Yet, underlying this potential trade agreement is that both have been too quick to cast the TPP as a weapon in its desire to contain China.

Flanked by Japan and America, the TPP would link countries which make up 40% of global GDP. That could boost world trade and output by as much as $220 billion a year by 2025. It is aimed at reforming difficult areas such as intellectual property, state-owned firms and environmental and labour standards. It would link economies that lie at different ends of the spectrum of development – from Vietnam to Australia.

But, crucially, the TPP will not happen without fast track, which forces Congress into a yes/no vote on any pending trade deal (avoiding the risk that it will be amended into oblivion). And the passage of fast track will no-doubt face a lot of scepticism from congressional Democrats. There are those who will be implacably opposed, whilst others will want America to have a bigger arsenal with which to fight against unfair traders. Driven by a conviction that China artificially holds its currency down and destroys American jobs, some, such as the New York senator Charles Schumer, remain determined that fast track should include a provision that would make sure any specific trade deal included sanctions on currency manipulation.

Attaching a currency-manipulation clause to trade deals is a poor idea. Not only are they hard to define but the addition of such clauses makes reaching an agreement less likely. But Mr Schumer’s demands are hard to ignore given that the Obama administration has already, mistakenly, directly pitched TPP as a counterbalance to an assertive China.

While Mr Abe has also committed his country to joining the TPP on strategic grounds, the same mistaken logic of counterbalancing China looks set to cause problems in Japan. For example, Mr Abe is a born admirer of free trade. When he first entered negotiations, some of his backers believed that, by playing the China card, Japan would be spared from making real concessions: that America would care more about a pact that excluded China than about prising open Japan’s most protected markets, particularly rice.

Japan will want to keep tariffs high. The best it may offer will be to allow in a fixed quota of tariff-free rice from the other TPP members (including America).

If the China-containment logic prevails and leads to a minimalist agreement, then the economic gains from TPP will be slim. That was never TPP’s aim, but by having real value to set high new standards for world trade. That requires the boldest possible agreement.

In the long run, the world must surely gain if China joins the pact. Yet, the rhetoric makes trade negotiations sound like a contest. It shouldn’t be that way. This is a battle where the more you give away the more you win.

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China, Economic, Government, Politics

Economic (and political) reforms in China…

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ECONOMIC DATA from China reveals that growth has slowed sharply and that deflation has set in. As China’s economy is being weighed down by both a property slump and weak factory production, many may conclude that the received wisdom over China belongs to the pessimists. Certainly, manufacturing output is at its weakest since the dark days of the global financial crisis. In the first three months of 2015, GDP grew at ‘only’ 7% year-on-year. Growth predictions suggest that this year will probably be China’s weakest in 25 years.

After three soaring decades, fears are rising that China is on the verge of an economic crash. That would be a disaster. China is the world’s second-largest economy and Asia’s pre-eminent rising power. Fortunately, however, the pessimists are missing something from their presumptive models which are not truly reflective of China today. China is not only more economically robust than they allow, it is also putting itself through a quiet (and welcome) financial revolution.

The robustness rests on several pillars. The vast bulk of China’s debts are domestic, and the government still has enough leverage to stop debtors and creditors getting into a panic.

The country has been steadily shifting the balance away from investment and towards consumption, which will help to put the economy on a more stable footing. With a boom in services, China generated over 13m new urban jobs last year, a record that makes slower growth acceptable. Given China’s huge economy, expected growth of 7% this year would boost the global economy by more than 14% (compared to 2007).

But the real reason to doubt the pessimists is China’s reforms. After more than a decade of dithering, the government is acting in three vital areas. First, in finance, it has started to loosen control over interest rates and the flow of capital across China’s borders. The cost of credit has been historically and artificially low, minimising the returns available to savers, as well as succouring inefficient state-owned firms and pushing up investment. Caps on deposit rates are becoming less relevant, thanks now to an explosion of bank-account substitutes that have attracted almost a third of household savings. The governor of China’s central bank, Zhou Xiaochuan, has said there is a ‘high probability’ of full-rate liberalisation by the end of this year.

China is also becoming more tolerant of cross-border cash flows. Slowly but surely, the yuan is becoming more flexible; international conglomerates and multinational firms are able to move revenues abroad far more easily than before. The government’s determined stance to get the IMF to recognise the yuan as a convertible currency before the end of 2015 should pave the way for bolder reforms.

The second area is fiscal. In the early 1990s, reforms gave local government bodies greater responsibility for spending, but few and limited sources of access to revenue. China’s problem of too much investment since then largely stems from those policies. Stuck with a flimsy tax base, cities have relied on sales of land to fund their operations and have engaged in reckless off-balance-sheet borrowing.

The finance ministry insists it has a plan in place to sort out this mess by 2020. Part of those plans include central government transferring funds to the provinces for social priorities, while local government agencies are being promised more in tax revenues. A pilot programme has already been launched in an attempt to clear up local-government debt. This will lay the ground for a municipal-bond market – which, despite the risks, will likely be much better than today’s opaque funding for provinces and cities.

The third area of reform is administrative. At the start of his premiership in 2013, Prime Minister Li Keqiang pledged that he would cut red tape and bureaucracy by making life easier for private companies. Since then, there has been a boom in the registration of private firms: 3.6m were created last year, almost double the number registered in the previous year.

 TWO

IN TIME, the cumulative effects of these reforms will lead to capital being allocated more efficiently. Lenders will price risks more accurately, with the most deserving firms being given funding options and savers earning decent returns. This will have the effect of slowing China’s economy down – how could it not? – but gradually and without breaking the system.

Dangers will remain. Liberalisation breeds instability. When countries ranging from Thailand to South Korea dismantled capital controls in the 1990s, their asset prices and external debts surged, which ultimately led to the then banking crises of south east Asia. China has strong defences but nonetheless its foreign borrowing is rising and its stockmarket is up by three-quarters in just six months.

How politics changes in China is also important. Whilst the economic reforms the country proposes have high-level backing, the anti-corruption campaign of President Xi Jinping means that Chinese officials live in a state of constant fear of state investigators. Many officials dare not engage in local experiments for fear of offending someone powerful.

Political reforms matter, too, because there is a pressing need to end the dire system of hukou, or household registration, which relegates some 300m people who have migrated to cities from the countryside to second-class status and hinders their ability to become empowered consumers. Similarly, farmers and ex-farmers need the right to sell their houses and land, or they will not be able to share in China’s transformation.

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Asia, China, Economic, Europe, Government, Intelligence, Middle East, Military, National Security, NATO, Society, United States

US Defence Strategy…

(From the archives) Originally posted on January 7, 2012 by markdowe

SHIFT IN AMERICA’S DEFENCE STRATEGY

On Saturday, 07 January, 2012, the Editorial of the Daily Telegraph focused on America’s shift in defence strategy, following Thursday’s announcement by President Barack Obama. The US is to focus less on Europe and more on Asia following the rising threat of China.

The Editorial states:

‘The Pentagon briefing room rarely hosts all of America’s service chiefs, let alone the president. Its use by Barack Obama to announce the conclusions of his defence review was designed to add a sense of drama – and the occasion certainly lived up to its billing. Future historians will probably conclude that this was the week when America’s entire foreign and defence strategy pivoted decisively away from Europe and towards the Pacific. More ominously, it might also mark the onset of a new, if concealed, arms race between the US and its aspiring rival, China.

First things first: America’s military dominance will remain unchallenged for the foreseeable future. Mr Obama might have announced spending cuts of almost $500 billion over the next decade, but this amounts to a light trim for a defence machine with an annual budget of $650 billion, amounting to 45 per cent of all military expenditure in the world. America is not axing capabilities in the foolish fashion of British governments; rather, its power is being focused on the great strategic challenges of the next century. These can be simply summarised: the struggle for mastery in Asia, home of the world’s most populous countries and fastest-growing economies, and responding to sudden crises. To this end, the US will reduce its presence in Europe, cut 90,000 soldiers and bulk up in the Pacific, with new bases in Australia and elsewhere. As for other flashpoints, few will be surprised that the US policy stresses the goals of containing Iran and guaranteeing free passage through the Strait of Hormuz.

On a purely military level, two points stand out. The US might be cutting its army, but it has ruled out reducing its fleet of 11 aircraft carriers, each of which packs more punch than the entire air forces of most countries. While China’s defence budget has recorded double-digit increases for the past decade, it has still launched only one carrier – an old Russian model of doubtful combat value. Second, Mr Obama stressed his determination to invest in “intelligence, surveillance and reconnaissance”. Put simply, the US will seek to extend its lead in the most advanced combat systems: where scores of troops – and hundreds of support staff – might once have been required to dispatch a senior al-Qaeda operative, now one unmanned drone can do the job.

America’s new course could well be shifted by a strategic shock akin to the September 11 attacks. Nevertheless, this plan will have momentous consequences for Europe and Asia alike. For decades, the US has underwritten the security of the Atlantic as well as the Pacific, effectively allowing Europe a free ride and permitting a string of Nato members the luxury of running down their defence budgets. This era is rapidly coming to a close. Yet with a few honourable exceptions, such as Britain and France, European powers have failed to fund their armed forces adequately, or deploy them when needed. Germany, in particular, must overcome the burden of its history and face up to the responsibilities that go with being the Continent’s leading economic power.

Mr Obama’s address studiously refrained from mentioning China, the country that probably has most at stake. Beijing’s leaders will now have to make far-reaching choices of their own. As events in Burma have shown, China’s “peaceful rise” has alarmed many of its neighbours: for most countries in the region, American power and values remain far more appealing. Moreover, China has grown rich largely thanks to trade, not least with the US. Faced with the net of containment that America is quietly laying across the Pacific, China will search for the Achilles’ heel of the US Navy, perfecting a new generation of missiles capable of destroying aircraft carriers from hundreds of miles away, working out how to cripple the internet, and how to blind the US satellite network, on which all its military assets now depend.

The world will pay a bitter price, however, if this veiled arms race between America and China escalates. History shows that free trade and military rivalry – however disguised – make for uncomfortable bedfellows. Beijing has gained rapidly in both wealth and power. The manner in which it chooses to pursue them now will have consequences for us all.’ [sic]

 

MD responded:

Whilst the US has declared China as a threat and announcing Asia as a priority, America is also to invest in a long-term strategic partnership with India. India will become the new powerful Asian ally of the United States in the region. In rolling out its new strategy, the Pentagon has made clear that the fronts for potential conflicts are shifting towards China. The US says that all of the trends – whether that is demographic, geopolitical, economic or military – are shifting towards the Pacific and, that over the long-term, China’s emergence as a regional power will have the potential to affect the US economy and security in a variety of ways.

It shouldn’t be in any doubt that China has unsettled its neighbours over several years with the expansion of its navy and improvements in missile and surveillance capabilities. The Pentagon is anxious about China’s strategic goals as it begins to search for a new generation of weapons.

The US defence strategy followed a major diplomatic push by Washington to expand security partnerships with its allies in the region. Last month, the US, India and Japan held their first trilateral meeting in an attempt to counter China’s rising influence in the Asia-Pacific.

China has advanced its influence in the region, along with allies like North Korea, Pakistan, Myanmar and Sri Lanka. Over recent years it has established itself as a growing, and sometimes bullying power in the Pacific, particularly in East Asia. Most of the countries, though, in the Association of Southeast Asian Nations (ASEAN) have festering territorial disputes with China. America’s new emphasis on Asia and the containment of China also stems from the fact that the Asia-Pacific region now constitutes the centre of gravity of world economic activity.

But is America’s new stance the beginning of something that could fan Cold war-style antagonism?

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