Im-Politic: New Signs that Biden Will Lift the China Tariffs – & That Beijing is Counting on It

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China, China tariffs, currency, election 2020, exchange rates, Im-Politic, Joe Biden, Kamala Harris, Mike Pence, Susan Page, tariffs, Trade, trade war, Vice Presidential debate, Xi JInPing, yuan

Between wall-to-wall coverage of the fly and the smirks, it was easy to lose sight of one of the most important reveals of Wednesday’s vice presidential debate: There’s now more reason than ever to believe that if Joe Biden becomes President, he’ll lift President Trump’s tariffs on China. And just as important, there’s now more reason than ever to believe that this is exactly what China is expecting.

Whether you believe that Trump-type China trade policies have been needed and/or have worked (two closely related but not identical matters), the likelihood that the tariffs would be toast is incredibly important because it begs the questions of whether the Democratic nominee has a coherent alternative China trade poicy in mind that can adequately serve U.S. interests (along with alternative investment and tech policies) and whether he’s capable of developing one.

As known by RealityChek regulars, I believe that on both scores, the answer is an emphatic “No.” But what’s more important right now is making clear that Biden running mate Kamala Harris’ debate performance strongly indicated that a major course change is coming.

First, though, a deserved swipe at moderator Susan Page’s China question. Page, the Washington Bureau Chief of USA Today, inadvertently reminded viewers (and should have reminded the Commission on Presidential Debates that organizes such events) why veteran campaign and White House reporters are almost uniquely unqualified to serve in these roles – at least if you’re looking for some minimally satisfactory discussion of issues.

For these journalists tend to be preoccupied with politics, not policy – and with the most superficial horse race or gossipy dimensions of politics at that. As a result, their substantive background is even less impressive than that usually boasted by colleagues who are supposed to know something about the issues they cover (a low bar).

So although Page deserves some credit for even bringing up the topic of China policy, no one should have been surprised by the Happy Talk nature of her question. I mean, here’s a country that’s been blamed across the American political spectrum for destroying huge numbers of American jobs with its wide-ranging trade predation, whose tech companies have been just as widely deemed as dangers to U.S. national security and American’s privacy rights, which increasingly is threatening U.S. allies and other countries in the “Indo-Pacific” region (foreign policy mavens’ latest name for the Asia-Pacific region, due to India’s, and which is treating its own population ever more brutally.

And Page’s question was dominated by claims that China is “a huge market for American agricultural goods” and “a potential partner in dealing with climate change and North Korea”? Not to mention suggesting that its role in bringing the coronavirus to the nation and world is nothing more than a charge leveled by President Trump?

All the same, Harris’ answer was what counted:

“Susan, the Trump administration’s perspective, and approach to China has resulted in the loss of American lives, American jobs and America’s standing. There is a weird obsession that President Trump has had with getting rid of whatever accomplishment was achieved by President Obama and Vice President Biden. For example, they created, within the White House, and office that basically was just responsible for monitoring pandemics. They got away, they got rid of it.”

Previously that evening, she argued that:

“You, [Vice President Mike Pence] earlier referred to, as part of what he thinks is an accomplishment, the President’s trade war with China. You lost that trade war. You lost it. What ended up happening is, because of a so called trade war with China, America lost 300,000 manufacturing jobs. Farmers have experienced bankruptcy, because of it. We are in a manufacturing recession, because of it. And when we look at this administration has been, there are estimates that by the end of the term of this administration, they will have lost more jobs than almost any other presidential administration.”

Let’s leave aside the accuracy or relevance of any of these points – like the 300,000 manufacturing jobs claim loss claim that apparently comes from an economist who admits his 2016 predictions about economy’s performance during the Trump era were completely off-base; or the plainly nutty insistence that the Trump China policy cost American lives.

If Harris believes any of this, and especially that the trade war has been “lost,” then clearly the only important question about the China tariffs isn’t whether they’ll be lifted by a President Biden, but how fast.

Moreover, there’s abundant evidence that Biden fully agrees that these Trump measures have been seriously counter-productive. When asked in August if he’d “keep the tariffs,” he responded, “No. Hey, look, who said Trump’s idea’s a good one?” said Biden. “Manufacturing has gone into a recession. Agriculture lost billions of dollars that taxpayers had to pay.” In other words, most of the main anti-tariff arguments in two pithy sentences.

An aide to the former vice president tried to walk back these remarks, shortly afterwards, but Biden’s words perfectly fit journalist Michael Kinsley’s epic definition of what’s usually mischaracterized in American politics as a “gaffe”: an instance “when a politician tells the truth—some obvious truth he isn’t supposed to say.”

Equally interesting and important with regard to the Biden-Harris China policies – one clear and one possible new sign that Beijing is actively rooting for their success, and assuming the tariffs’ removal. The first came during the vice presidential debate, when Chinese authorities censored some of Pence’s critical comments on China just as Chinese audiences were about to hear them, and then restored the signal in time for Harris’ rejoinder.

The second came last night, when in its first announcement since the end of its Golden Week holiday of a new exchange rate for China’s currency, the yuan, versus the U.S. dollar, Beijing revalued (i.e., made it more expensive compared with the greenback) by the greatest amount in four and a half years. The main reason – at least as I see it: China believes that Biden will win, and is permitting its currency to strengthen because any competitiveness loss by its exports resulting from this and even significant further revaluation will be more than offset by the removal of U.S. levies that have typically hit 25 percent.

Of course, I could be wrong about Biden. So could China. But keep in mind that the former Vice President boasts that he knows Chinese dictator Xi Jinping well because of all the time he’s spent with him. Does anyone seriously think that, by the same token, Xi hasn’t learned a thing or two about Biden as well?

(What’s Left of) Our Economy: More Trade Derangement Syndrome – on China & Currency Wars

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China, currency, currency manipulation, currency wars, Financial Times, Martin Wolf, Paola Subacchi, Project Syndicate, renminbi, Trade, Trump, yuan, {What's Left of) Our Economy

Trade issues’ ability to completely muddle the thinking of supposed experts has never been more prominently displayed than in this recent column, from a leading European economist, on China’s manipulated currency.

Writing for the Project Syndicate website (which bills itself as “the world’s opinion page”), Paola Subacchi insists that China is not likely to turn the recent slide in the value of its renminbi (also called the yuan) into an “’engineered’ competitive devaluation” because “a weak renminbi has more costs than benefits” for the People’s Republic.

Of course, the case for worrying about a Chinese drive to weaken its currency stems from fears that a cheaper renminbi/yuan would give Chinese goods wholly artificial price advantages over U.S. and other foreign counterparts in markets the world over. The result would be a big trade lift for the Chinese economy at the expense of its competitors — and for reasons that have nothing to do with either free trade or free markets.

Anyone pretending to know what Chinese leaders are really thinking about such vital economic (or other) matters is blowing smoke. But it’s nothing less than absurd to suppose that the considerations Subacchi cite for her China currency optimism are taken the slightest bit seriously in Beijing.

For example, the author argues that “by increasing import prices and bolstering export sectors, a weaker renminbi would undermine the Chinese government’s goal of shifting away from export-led growth and toward a model based on higher domestic consumption.” But although it’s true that Beijing has long talked about this goal, it’s highly doubtful that China’s are prioritizing these days – if they ever have.

After all, as made clear in this new column from the Financial Times‘ Martin Wolf, China in recent years has been relying on domestic purchases (especially investment spending) supercharged by official stimulus policies to keep growth at satisfactory levels. This shift, however, has scarcely been voluntary. The choice was essentially forced on China by the sharp downturn in global trade triggered by the last global financial crisis and recession, which pummeled foreign markets for Chinese products. The results, Wolf shows, have not been a healthily rebalanced Chinese economy, but one that’s growing more slowly, and whose growth is dangerously reliant on an explosion in the country’s indebtedness. Is it really plausible that China is seeking more of the same?

According to Subacchi, “a weaker renminbi could [also] invite renewed US complaints about currency manipulation.” President Trump has just revived this charge. But the Chinese so far seem to be counting on blunting the new U.S. trade offensive by imposing their own retaliatory tariffs on American products (especially from politically important states and Congressional districts), and thus prompting a decisive counterattack by vulnerable political and economic interests. A continuingly weakening renminbi/yuan would plainly help, too. 

Moreover, Subacchi herself clearly regards Trump-ian U.S. trade policies as a major mistake, describing them (as well as China’s currency policies) as “not good for anyone.” Yet for those renewed U.S. complaints about currency manipulation to matter to Beijing, they’d need to be followed up with a credible threat of tariff responses – and, if needed, actual levies. Is she therefore suggesting that playing trade hardball makes no sense unless the target is China? Maybe she’ll explain in her next article.

“Finally, and more crucially,” the author writes, “a weak renminbi at the same time that dollar-denominated assets become more attractive could cause China to suffer capital flight.” She’s correct  – but oddly overlooks Beijing’s option of tightening capital controls – a policy that’s not exactly unprecedented for Chinese leaders.

Subacchi does deserve praise for spotlighting major actual and potential weaknesses in China’s economic and financial position. Unfortunately, the response she says she favors to the prospect of a full-fledged Chinese-launched currency war – “the world should call its bluff” – is wishful thinking. For the world as a whole – which remains heavily dependent on growing by selling to America’s gargantuan, wide open market – has displayed much more interest in protecting this convenient, though dangerously unsustainable, arrangement from vigorous U.S. responses than in imposing any significant disciplines on China.

In other words, the odds remain high that unless the prospect of a China-launched currency war is met with unilateral – i.e., Trump-ian – American counter moves, it won’t be met at all.

(What’s Left of) Our Economy: The Case for Keeping it Simple with China Trade Just Got Stronger

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China, currency, currency manipulation, exchange rates, Great Recession, import prices, imports, Labor Department, Robert Lighthizer, Trump, U.S. Trade Representative, yuan, {What's Left of) Our Economy

I haven’t been closely following the Labor Department’s import price data lately, and that’s been an oversight. As is clear from this morning’s figures (for August), they keep telling a fascinating and important tale about China’s ongoing manipulation of its currency and how it does and doesn’t impact U.S. trade with the People’s Republic. More specifically, examining the data over time reinforces a strengthens a point I’ve posted on previously – that as important as this currency protectionism is, it’s far from the only predatory Chinese practice that’s been shafting domestic companies and workers exposed either directly or indirectly to Chinese competition.

Just as a refresher, unlike most other trading countries and regions, China prohibits the free buying and selling of its currency. For most of the previous decade, Beijing’s aim has been to keep the value of the yuan artificially low versus most other currencies and especially the U.S. dollar – in order to give its goods and services price advantages over foreign rivals in markets everywhere. As a result, China’s exports got a government-aided boost worldwide, and its domestic industry was able to undersell imports in its home market – all for reasons having nothing to do with free trade or free markets generally.

Since the latter part of that decade, and especially earlier during the current economic recovery, the story has been more complicated. The main reason: China was getting worried about wealthy Chinese concerned about political stability or the economy’s future spiriting too much of their wealth out of the country, for stashing in countries (like the United States) considered a lot safer. These capital outflows began depressing the yuan’s value much faster than Beijing wanted, and even threatened to cause a worldwide crisis of confidence in the currency – and the broader Chinese economy. So for much of this latter period, China has been trying to prop up the yuan’s value to some extent – even as its wary that an overly strong yuan would jeopardize the exports on which its growth still heavily relies.

Trade policy critics have rightly focused much and even most of their anti-China ire on currency manipulation, and that’s been understandable for two main reasons. First, this policy affects the relative prices of everything sold back and forth between the United States and China; and second, currency manipulation is one of the few protectionist practices that even some of the globalization-happy economics and business establishment (and the latter’s political hired guns), can be convinced to combat. (Much of the rest of this group, though, will simply grandstand against this form of protectionism.)

Nonetheless, the import price numbers, coupled with the oscillation in China’s currency priorities, the consequent roller-coaster ride of the yuan’s value versus the dollar, and the actual trade flows, show that the cost of Chinese goods and services aimed for the American market stems from many other causes.

The Labor Department’s import price data for China goes back to 2004, and it shows that, in the 13 years since, on an August-to-August basis, the prices of purchases from China Americans can make has fallen in eight years and risen in five. As for the yuan’s value, it’s strengthened versus the U.S. dollar in nine of those 13 years, and weakened in four.

What happens when the two indicators are paired? The numbers reveal that in five of the 13 years, the prices of imports from China in the American market have fallen while the yuan has strengthened – which isn’t supposed to happen if you believe in currency uber alles. In another year, the prices of those imports rose while the yuan weakened – another counterintuitive result. In seven of the thirteen years, in other words, currency values and import prices seem to have behaved as they should have, but in six (nearly half the time), they didn’t.

Also important : In three of the four years when both import prices and the yuan went up, the yuan’s rise was much greater, most often by a factor of two to one. And in two of the three years when both indicators fell, the change in the yuan again was much greater. So at the very least, even when the relationship is looking like economists tell us it should, it takes a lot of yuan movement to generate significant import price changes. Clearly, therefore, other factors must be at work.

In this vein, the yuan’s value and the changes it undergoes doesn’t seem to have an especially strong relationship with the amount of goods that American imports from China. Of course, they have some effect. After all, all else equal, if U.S. customers buy a certain quantity of items and services from China one year, and the same quantity the next, and the price of those goods and services falls (for whatever reason), the value of those purchases will go down. And naturally, the converse is true as well.

This point matters because purchasing patterns rarely respond to price changes right away, and the lag can mean that the impact of currency changes on import values can take some time to materialize – and often more than a year. But even taking this reality into account produces a fuzzy picture. For example, between August, 2004 and August, 2005, U.S. goods imports from China (which make up the vast majority of American purchases from China) jumped by more than 24 percent even though import prices fell (by 1.10 percent) and the yuan rose versus the dollar (by 2.13 percent). The next year, Americans bought 19.14 percent more products from China, despite their prices falling yet again (by nearly as much – 1.01 percent), and the yuan rising again (also by nearly as much – 1.80 percent).

Between August, 2007 and August, 2008, import prices rose by a very large 4.95 percent and the yuan strengthened by an even greater 9.55 percent. Yet U.S. goods imports from the People’s Republic increased by double digits again (11.96 percent). The following year, however, import prices plummeted (by 3.08 percent), and the yuan weakened by 0.70 percent. And did American imports surge again? Not even close. They nosedived by 18.93 percent.

Sharp-eyed RealityChek readers will realize why: The Great Recession was intensifying in 2008 and lingered well into 2009. So Americans’ consumption of just about everything fell off a cliff for a while. Between the following Augusts, neither the prices of imports from China nor the yuan’s value moved much, and America’s goods imports from China nonetheless soared by more than 37 percent.

Yet you don’t need these kinds of extreme economic events for import prices, import amounts, and yuan movements to confound expectations, lag or not. From August, 2011 to August, 2012, both the prices of Chinese imports and the value of the yuan were up (both by a bit) and American imports from China dipped by 0.25 percent. Even stranger, the American economy grew by a pretty decent 2.39 percent (in inflation-adjusted terms) during that period.

The following year, U.S. growth was down to 1.69 percent, prices of imports from China dropped (by a meaningful 1.24 percent), the yuan rose (by a much greater 3.61 percent), and American purchases from China jumped from a small dip to more than five percent growth.

The point here is not that China’s currency policies don’t matter, but that the prices of Chinese goods and services, and therefore America’s trade performance with the People’s Republic, are influenced by a wide array of factors. Some are legitimate – for instance, if China keeps selling Americans greater amounts of relatively pricey advanced goods (like industrial machinery and high tech products), and less in the way of cheaper, simpler products (like clothing and toys), as has been the case, the price of the average import from China is going to rise. But many reasons are much less legitimate (e.g., changing levels of subsidies like value-added tax rates), and these can be so numerous, so fungible, and therefore so difficult to document that trying to isolate them and attack them piecemeal is a fool’s quest.

Far better is to decouple American tariff policy completely from specific items of evidence of individual predatory trade practices and impose these levies proactively, until they produce the desired effects on bilateral trade flows. In fact, the case for such a sweeping approach was made just yesterday, and is worth quoting at length:

“[T]here is one challenge on the current [trade] scene. It is substantially more difficult than those faced in the past, and that is China. The sheer scale of their coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer and to distort markets, in China and throughout the world, is a threat to the world trading system that is unprecedented.”

This speaker also argued that “The years of talking about these problems has not worked, and we must use all instruments we have to make it expensive to engage in non-economic behavior.”

His name is Robert Lighthizer, he’s President Trump’s chief trade negotiator, and the devilishly complex relationships between currency values, import prices, and trade flows just add to the case for the administration to start following this advice pronto.

(What’s Left of) Our Economy: Trump’s Real China Currency Blunder

Tags

airstrikes, alliances, America First, chemical weapons, China, currency, currency manipulation, dollar, exchange rates, North Korea, nuclear weapons, predatory trade, Syria, Trade, trade barriers, Trump, Xi JInPing, yuan, {What's Left of) Our Economy

What was worst about President Trump’s decision yesterday to let China off the currency manipulator hook (for now) was not the scrapping of a long-time campaign promise it represented. What was worst about the decision was its geopolitical rationale – that is, Mr. Trump’s judgment that major Chinese cooperation in reining in North Korea’s nuclear program could be secured if his administration moderates or delays various efforts to counter Beijing’s trade predation.

Nonetheless, some recent developments also presage reasons for modest optimism that a sounder approach to currency manipulation by China (and other countries), at least, will eventually emerge if it becomes clear Beijing is welshing on this deal.

The president’s new China policy makes least sense from a pure negotiating tactics standpoint. After all, what course of action could now be more tempting than for China to keep stringing America along with promises to get tough on North Korea, and even with token actions suggesting that meat is being put on these bones? Think “Charlie Brown,” “Lucy,” and “football.” And how will the president decide that his gamble has failed?

Moreover, Mr. Trump’s own views of China’s clout with North Korea seem confused, at best. On the one hand, the president must (logically) believe that China can make much more of a difference in resolving the North Korea situation than it’s so far chosen to. Why else would he offer China the valuable benefit of better terms of trade than it would otherwise receive? On the other hand, Mr. Trump said in an interview with The Wall Street Journal “After listening for 10 minutes [to Chinese leader Xi Jinping at their summit a week ago], I realized it’s not so easy. I felt pretty strongly that they had a tremendous power [over] North Korea. … But it’s not what you would think.” So here he’s indicating that Beijing can’t help decisively at all.

Related Trump statements point to another major negotiating No-No: Rewarding interlocutors for steps they would take anyway. The president is now on record as stating that Xi “means well and wants to help” on North Korea. But this confidence raises the question, “Why?” It’s of course possible that Chinese policy has entered a new, more charitable phase. It’s more likely, however, that Beijing is becoming increasingly worried about the situation in its next-door neighbor spinning out of control and triggering a conflict that could go nuclear right on its borders.

Indeed, a recent editorial from its own government-controlled press clearly signals that those dire concerns are China’s main motivator: “China…can no longer stand the continuous escalation of the North Korean nuclear issue at its doorstep. Instead of accepting a situation that continues to worsen, putting an end to this is more in line with the wish of the Chinese public.”

Even more revealing, the same editorial made plain as day that official Chinese nerves have been frayed further by Mr. Trump’s willingness to go-it-alone militarily in Syria (when he ordered airstrikes in the middle of his meetings with Xi), by his threat to take a similar course of action against North Korea, and by his dispatch of a powerful American naval force to Korean coastal waters. In other words, the president’s apparent comfort with using force already has caught China’s attention.

Better yet, some concrete evidence of this success has appeared. China seems to be reducing its imports of coal from North Korea – one of Pyongyang’s few major sources of foreign exchange – and it abstained yesterday from voting on a UN resolution condemning Syria’s government for the chemical weapons use that prompted the U.S. cruise missile attack. Until then, China had vetoed similar UN resolutions. Why, therefore, would Mr. Trump sweeten the supposed deal further with trade breaks?

At the same time, these latest Trump decisions are sending signs about the president’s national security strategy and overall priorities that are equally disturbing. Principally, during his campaign for the White House, Mr. Trump displayed a keen awareness of the burgeoning nuclear risks being run by the United States by maintaining its defense commitments in East Asia. In numerous remarks that were pilloried by an ossified bipartisan American foreign policy establishment, candidate Trump quite sensibly suggested that the United States should transfer much of this risk to the local countries (like China) most directly threatened by the North Korean nuclear program. Yesterday, Mr. Trump endorsed America’s longstanding Asia strategy even though the North can increasingly call the U.S. nuclear bluff on which regional deterrence has been based with forces of its own that can strike American targets.

Even more striking, Mr. Trump’s new quid pro quo has demoted policy options that can deliver major economic benefits to his core voters and the entire U.S. economy (more trade pressure on China) back to their longstanding position subordinate to national security strategies that primarily help other countries (the Asian allies covered by the American nuclear umbrella). Far from the type of America First strategy he touted during his campaign and especially in his Inaugural Address, these new Trump moves add up to an America Last strategy.

All the same, Trump’s new approach could set the stage for improved U.S. anti-currency manipulation strategies should circumstances require them. Although unmistakably disheartening to many trade policy critics, this latest American China currency decision was defensible on its own terms. It’s true that substantial evidence continues indicating that China’s yuan is significantly undervalued versus the U.S. dollar – and still enables producers in China (including those owned by or linked with U.S. and other foreign-headquartered companies) to offer their goods for artificially low prices in markets around the world. Nonetheless, it’s also true that China has permitted its (surely dollar-dominated) foreign currency reserves to drop by about 25 percent since 2011 – largely because it’s been selling those reserves and buying yuan in order to curb worrisome capital flight. In other words, Beijing has been trying to support the yuan versus the dollar, and keep its value higher than it would be were it freely traded.

Yet there’s absolutely no reason for trade policy critics – or the U.S. government – simply to conclude that ambiguous circumstances simply force America to accept the status quo. In fact, such shoulder-shrugging would amount to rewarding China currency cheating that the conventional wisdom now admits lasted for years, and whose cumulative effects continue to undercut the price competitiveness of domestic U.S. manufacturers and other producers.

So what to do? According to at least one press report, the Trump administration is considering revamping currency manipulation policy in ways that would appear to abandon the current, blinkered approach in favor of one that takes these cumulative effects into account. Specifically, a Reuters article last week suggested that one option that’s attracted the administration’s attention would involve lengthening “the time period for reviewing currency market interventions from 12 months to several years, capturing more past interventions by China….” At least logically, this shift would signal recognition that the impacts of these interventions (to suppress the yuan’s value) are dynamic, and long-lasting.

Even better, however, would be to recognize that, important as it’s been because of its effects on prices across the Chinese economy, currency manipulation is only one form of trade predation practiced by China, and that such individual policies can easily frustrate current legalistic countermeasures by virtue of the powerful and secretive Chinese bureaucracy’s ability to turn them on and off at will – often with little more than a phone call. More important, China has successfully used these ploys in the past. And P.S.: Other Asian economies are just as skilled as China’s at pulling off these scams.

In other words, the various mercantile measures used by China and others to distort markets are completely fungible. Dealing with them effectively therefore requires Washington to become much more agile and flexible in response. And the critics need to stop focusing so tightly on currency manipulation and keep the much bigger, more important China and global trade picture in mind.

For the entire U.S. economy has a big stake in the Trump administration putting these changes into effect before Chinese and other countries’ trade predation sucker punches even more of its most productive sectors – whether they interfere with the president’s new North Korea strategy or not. So, in all likelihood, does Mr. Trump’s political future.

(What’s Left of) Our Economy: Signs that Chinese Currency Manipulation is Back

Tags

China, Congress, currency, currency manipulation, exchange rates, Obama, TPP, Trade, Trans-Pacific Partnership, yuan, {What's Left of) Our Economy

For several years, China has been the gift that has kept on giving to cheerleaders for current American trade policies, as its currency policies allowed President Obama and his trade supporters to all but declare “mission accomplished” for the decision to address Beijing’s predatory approach to globalization through quiet diplomacy, not punitive tariffs.

Now after letting its currency strengthen versus the U.S. dollar, Beijing, is permitting the tightly controlled yuan weaken once again. So as during most of the previous decade, Chinese goods are once again getting major price advantages over competing products in all global markets for reasons having nothing to do with free markets or free trade. Let’s see if Mr. Obama and his backers will be as quick to admit failure as they were to claim success.

China’s currency policies have had their ups and downs for the last 15 years or so, and throughout the cheerleaders consistently have mis-represented the idea of proper currency valuation. Moreover, some impressive evidence indicates that the yuan has been much more undervalued – and therefore distorting trade flows – to a much greater extent than the standard exchange rate figures (from the Federal Reserve) show.

Nonetheless, it’s still important to note that those standard figures have reported a 20.39 percent increase in the yuan’s value against the dollar since July, 2005. It’s just as important to note that, during this period, the dollar is up versus a broad Fed measure of world currencies by about 7.70 percent, so by this key measure, China has been a big outlier in ways that work to its disadvantage.

And even though the yuan has fallen in value since it hit its peak versus the dollar, in mid-January, 2014, it’s fallen much less than that basket of other currencies – 8.63 percent for the yuan, as of the Federal Reserve’s latest (May 27) figures, versus 19.04 percent.

But the key baseline date Washington and everyone else should be looking at is last August 11. That’s the day the Chinese government clearly decided it had had enough of a stronger yuan, and devalued the currency by a stunning 1.83 percent in one day. And from last August 10 though May 27, the yuan has dropped by 5.67 percent versus the dollar. But that group of major currencies is down only 2.86 percent against the greenback. Moreover, since May 27, the yuan has been permitted to sink another 0.42 percent. (I couldn’t find a comparably recent number for that broad dollar index.)

With the American economy still mired in an historically sluggish recovery, and manufacturing output still faltering, expect all the remaining presidential candidates to start decrying Chinese currency manipulation again. If it continues, Beijing’s apparent gambit could also further diminish the chances that Congress will approve Mr. Obama’s Trans-Pacific Partnership (TPP) agreement, since a U.S. failure to respond adequately coupled with the deal’s own lack of currency disciplines with teeth would arguably turn Congressional approval into a green light for other would-be foreign manipulators. Pity the lawmaker who’d have to answer for that vote.

(What’s Left of) Our Economy: China Import Price Puzzles

Tags

China, competitiveness, currency, currency manipulation, dollar, import prices, imports, Little Murders, manufacturing, multinational companies, productivity, subsidies, technology transfer, Trade, value-added taxes, VAT, yuan, {What's Left of) Our Economy

One of my favorite literary passages of all times comes from “Little Murders.” If you’ve never seen the stage or film version, I strongly recommend both, and for me, the high point of this late-1960s Jules Feiffer 1967 black comedy about life in a rapidly deteriorating New York City comes when Detective Miles Practice exasperatedly describes his frustration at solving a massive ongoing wave of violent crime.

The 345 unsolved homicides he and his colleagues are investigating have three characteristics in common, Practice explains. “A – that they have nothing in common; B – that they have no motive; C – that, consequently, they remain unsolved.”

I’ve felt a little like Detective Practice today as I’ve tried to dig deeper than usual into this morning’s new Labor Department data on the prices of imports bought by Americans in April. And it’s not just that the figures seem to undercut an argument I’ve made consistently during the ongoing debate over U.S.-China trade policy. It’s that the differences among various industries defy anything close to easy explanation.

As many of you surely know, since early in the previous decades, Chinese government policies that determine the value of its currency, the yuan, versus that of the U.S. dollar have been major bones of contention between the two countries. Essentially, many Americans have accused Beijing of keeping the yuan artificially weak, which gives Chinese-made goods unwarranted price advantages over their U.S.-made counterparts in markets all over the world. And if Made in China goods are outselling Made in America goods for reasons having nothing to do with market forces, then American production and jobs will be penalized for reasons having nothing to do with free markets, or free trade, either.

Because this issue has loomed so large for so long, I’ve been following the import prices figure closely in order to see how the yuan’s changing value has affected the actual price of Chinese-made products in the American market. And what I’ve found indicates that, although currency values matter a lot, these prices doubtless change for a variety of other reasons, too – including other forms of Chinese government interference with trade, but not limited to such protectionism.

For example, if the Chinese are making growing quantities of relatively advanced manufactured goods and selling them to Americans, and de-emphasizing less advanced goods, then the effects of Beijing’s currency policies could be (at least partly) masked by the higher prices these more sophisticated products presumably command. And in fact, I’ve shown that precisely this shift in Chinese manufacturing and exporting has been taking place, and argued that, as a result, precisely this masking effect is influencing the prices of Chinese imports. To me, it’s strong evidence that China’s yuan is still too cheap – even though for reasons we needn’t delve into now, China is now trying to prop up the yuan’s value.

Now, however, I’m not so sure. Because the detailed, product-by-product figures kept and reported by the Labor Department show that in many cases, prices of advanced manufactured products sold by China to Americans are falling faster than the prices of less advanced goods. Moreover, the prices of many Chinese products in the U.S. market are falling more slowly than those of comparable imports from other countries – which supports the idea that Beijing’s new currency stance is harming Chinese products’ price competitiveness.

Some caveats need to be made at this point. First, the number of manufacturing industries in which direct comparisons can be made between the prices of Chinese and other imports is relatively small – because the Labor Department issues detailed data for many more U.S. imports overall than for U.S imports from China. Second, some of the missing China data concerns industries where Beijing has encouraged massive overcapacity – notably steel – and clearly helped create significant (and worrisome) deflation.

All the same, most of the statistics I’ve found are real head-scratchers. For example, since the business press has been filled in recent years with articles on strongly rising Chinese wages, it’s not entirely surprising to see that the cost of imports of Chinese garments – a labor-intensive industry – have actually increased a bit since 2012 (the earliest China-specific figures available), whereas overall garment import prices are down.

But why have the prices of Chinese-made clothing been so much stronger, and less internationally competitive, than the prices of Chinese made machinery – an admittedly broad category but one in which the output is very capital-intensive, complex, and (I thought) relatively expensive? (Think boxer shorts versus machine tools.) In fact, on the whole, the more technologically advanced a Chinese product is, the faster its price is falling and the more price competitive it is with foreign rivals.

Rapidly rising productivity could easily explain this trend for Chinese information technology products like computers and semiconductors and communications equipment. But if that’s the case, then why do goods that are less advanced but hardly primitive – like fabricated metal products and household appliances – display the opposite characteristics? This is a special puzzle given that fabricated metal products contain so much steel – which has been so rock-bottom cheap in China for so long. And why are China’s chemical products (another broad category) able to cut prices so impressively and gain on their competition in the U.S. market, but not plastics products – which are a major category within chemicals?

Some tentative conclusions and possibilities:

First, these figures are a valuable reminder that even manufacturing industries that seem closely related can have enough differences to produce widely varying results

Second, some of this variation in Chinese manufactures could reflect their positions on the government’s priorities scale. In principle, the products that perform best price-wise could be the beneficiaries of the biggest government subsidies (including value-added tax rates, which are extremely granular) and research budgets. They could also be the sectors where Beijing exerts the greatest pressure on foreign investors to transfer their best technology.

Third, since much foreign tech transfer in China is still voluntary, the price gap illustrated above also could stem at least partly from different tech transfer approaches taken by multinational companies from different countries. For example, it’s widely believed that American companies that operate in China – and which are especially active in information technology – share their know-how with Chinese partners much more freely than do firms from Japan and Germany.

Even so, however, these import price figures raise many more questions than they answer, and they seem to be telling us that all of us need to be paying a lot more attention to them.

(What’s Left of) Our Economy: Establishment China Experts Who Can’t Shoot Straight

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China, China content levels, currency, currency manipulation, devaluation, Donald Trump, Eswar Prasad, exchange rates, exports, Matthew Slaughter, protectionism, The Economist, The Wall Street Journal, The Washington Post, Trade, yuan, {What's Left of) Our Economy

This last week has made clear that it’s not just China’s economy and leadership that have been cut loose from their moorings. It’s also the leading economists and Big Media journalists who pretend they know much more about Chinese economic policies – and how America should deal with them – than the rest of us know-nothings.

Indeed, within the last two days, no less than two economists and The Economist magazine have published pieces intended to show the folly of those who have long urged American crackdowns on predatory Chinese economic practices like currency manipulation (which makes Chinese-made goods and services artificially cheaper versus all foreign counterparts all over the world), intellectual property theft and technology extortion, and illegal subsidization and the dumping into foreign markets of the resulting surplus output at cut-rate prices. And as always, you can be sure that the prominent placement of these pro-status quo messages reflects their endorsement by the publications in question.

The first addle-brained attempt to assure Americans that their government’s do-nothing China policy is on the right course came in a Washington Post article by former senior World Bank China expert Eswar Prasad. One of his main goals – which is anything but weird for an establishment voice – is debunking Donald Trump’s claim that “China is killing us” when it comes to trade. But then the weirdness comes non-stop.

First, Prasad seems to think that the way to discredit the Republican presidential front-runner is to show that China’s growth has not been “driven primarily by cheap exports” – and especially by sales of “cheap consumer goods.” But that’s never been Trump’s main concern, or that of voters critical of America’s China trade policies. Instead, it’s been the destruction of family-wage American manufacturing jobs by predatory Chinese trade practices.

Second, Prasad joins the crowd of so-called experts who try to show that China’s trade surplus with the United States isn’t as big as the headline figure suggests. The reason: So much of what the Chinese sell to this country consists of U.S.-made parts, components, and other inputs. But as I’ve pointed out, the evidence Prasad cites is of no comfort to American workers whatever. The Apple iPhone he uses as an example of a semi-faux Chinese export turns out to be made not mainly of American parts, but of other (protectionist) countries’ parts. And as made clear by his criticisms of Washington’s approach to trade with countries like Mexico and Japan, Trump fully understands that China isn’t America’s only international economic challenge.

Even weirder is that Prasad then goes on to point out that China’s manufacturing “has started moving up the value-added chain, shifting from a focus on low-cost, low-tech goods such as shoes and textiles to more sophisticated products with a higher technological content. “ He’s absolutely right. But does he think that none of these more advanced manufactures goes into China’s exports? If he does, he obviously isn’t familiar with findings from the World Bank and the International Monetary Fund – which show that the Chinese content of China’s exports has risen dramatically over the last 20 years.

No less bizarre was Matthew Slaughter’s Wall Street Journal op-ed yesterday arguing that “Movements in the yuan’s nominal exchange rate do not affect long-term trade flows or jobs in the U.S.” This Dartmouth economist is on reasonable ground in contending that “The exchange rate that matters for trade flows is the real exchange rate, i.e., the nominal exchange rate adjusted for local-currency prices in both countries,” and that this real exchange rate “in turn, reflects the deep forces of comparative advantage such as technology and endowments of labor and capital.”

What Slaughter seems to forget, however, is that China’s labor market is heavily repressed, and its government still tightly controls capital flows (although China has taken some steps towards liberalization). In other words, these determinants of comparative advantage are thoroughly manipulated by Beijing, and according to Slaughter, they do influence trade flows and their impact on national growth and employment. So by extension, China is manipulating that real exchange rate – and if the United States cares about the impact on its economy, it has no choice but to respond.

Just as odd – despite the author’s opposition to countering the trade effects of Chinese currency policy, he does acknowledge that China “has too many barriers to trade and investment, too much favor for local companies, too weak protection of intellectual property,” and that U.S. leaders need to “encourage China to overcome its policy shortfalls that truly do cost America good jobs at good wages.” Trump’s China trade position paper recognizes many of these “shortfalls.” But unlike Slaughter and other stand-patters, he understands that “encouragement” has failed for decades, and that stronger responses are needed.

The third example of China inanity comes from The Economist, which also seems determined to ease concerns about China’s currency manipulation even though it doesn’t mention the yuan’s recent slide. According to the magazine – which has always championed the cause of unfettered international flows of trade and other economist assets – currency devaluations are not nearly as big a deal as they once might have been because they’ve become less and less successful in artificially stimulating exports.

One big problem with this claim, however, is that it assumes devaluations are seen by trade policy critics as export boosters in all cases. And that’s a straw man. After all, export success depends on numerous factors, and if a national economy is otherwise a mess – as is the case with countries mentioned by The Economist like Russia and Brazil, cheaper currencies can’t possibly be panaceas. To some extent the article recognizes various complications. But they don’t come up until the piece is well underway.

And what’s also peculiar is that The Economist touts a method of calculating the appropriateness of exchange rates that pegs China’s yuan as – get this – nearly 50 percent undervalued. Does anyone seriously think that if Chinese exports became 50 percent more expensive, all else equal, they’d sell nearly as briskly?

Here’s a suggestion: How about Prasad, Slaughter, and The Economist writers get together, try to hash out their own differences, and see if they can produce a China article that’s halfway coherent? Almost anything has to be better than what they’ve done separately.

(What’s Left of) Our Economy: China is Snookering the IMF and US (Again) on Currency

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capital controls, China, currency, currency manipulation, devaluation, dollar, IMF, International Monetary Fund, Obama, reserve currency, TPP, Trade, Trans-Pacific Partnership, yuan, {What's Left of) Our Economy

Even given the laughably bad U.S. government record in gauging China’s trade and economic intentions and defending American economic interests against Chinese predation, Washington’s recent pronouncements and decisions on China’s currency policies have been abysmal. And they look worse and worse by the day.

Specifically, the Chinese seem to have taken the United States – and the rest of the world – to the cleaners. On the one hand, Beijing has apparently convinced American and global authorities that it’s becoming a responsible global financial player. On the other hand, it’s unmistakably resumed weakening its currency for trade advantage.

In recent years, the case for optimism about China’s role in the world economy has rested on what has been described as Beijing’s growing commitment to economic and financial reform. As the optimists noted, China had loosened its control over its currency even though this freer float had resulted in a strengthening of the yuan versus the U.S. dollar. All else equal, this approach eroded the price advantage enjoyed by Chinese goods versus their foreign counterparts due to China’s longstanding efforts to keep the yuan artificially cheap.

This increasingly hands-off currency policy, in turn, appeared to signal a broader resolve by China’s leaders to turn its entire financial sector into a genuine banking system rather than a mechanism for the state to dominate resource allocation. At the end of that road arguably lay a fundamentally more market-based, and thus healthier, Chinese economy – and possibly even a more democratic China, since the government would no longer be calling so many crucial economic shots.

In return, China has received nearer-term two major rewards. First, the International Monetary Fund (reflecting the views of the United States and other major economic powers that set its policies) admitted the yuan into it’s so-called basket of international reserve currencies. The main impact was symbolic, reinforcing the reality of China as a leading force in the global economy. But this is the kind of status that’s highly prized not only by Chinese leaders but by the entire society they rule – not to mention by many of their Asian neighbors.

Second, the yuan’s rise eased some of the pressure China faced to trade more freely. Here, the effect was mainly multilateral. The U.S. government has never responded effectively to Beijing’s currency manipulation, but the stronger yuan clearly helped Congress decide to fast track President Obama’s Trans-Pacific Partnership (TPP) agreement when it began considering passage despite its lack of enforceable currency rules. Although China is not yet a member, it stands to benefit handsomely, if only because of the deal’s loopholes, and its new currency stance enabled the president to portray a successful, informal jaw-boning campaign against the world’s leading instance of exchange-rate protectionism as a better approach than formal rules and sanctions.

Yet it’s become ever clearer that the yuan’s most recent months of strengthening reflected not a Chinese conversion to so-called fair trade, but the Chinese government’s need to stem the capital flight brought on by its broader prestige-focused financial reform measures. In effect, Beijing was facing the inevitable price of liberalization – especially in the face of an economic slowdown and a burst of turmoil in its so-called stock markets.

The United States and the world’s other leading powers might have been able to hold China’s feet to the fire by postponing the yuan reserve currency decision until Beijing demonstrated that its reforming ways would persist despite short-term economic pain. (A tougher TPP would have helped, too.) But they squandered their leverage by rewarding China prematurely – and the Chinese have taken full advantage. Since the yuan was officially brought into the reserve currency basket on November 30, its value versus the dollar has slid by nearly 0.80 percent. In the world of exchange rates, that’s a big change, especially in less than two weeks.

Further, this yuan weakening has come on top of the gargantuan near-two percent devaluation announced by China in mid-August. All told, since then, the yuan has fallen versus the dollar by a stunning 3.85 percent. Moreover, it’s been reliably reported that China has just tightened its capital controls again, and in recent weeks has ramped up its efforts to close the black market channels through which wealthy Chinese have been illegally transferring massive amounts of wealth abroad. The obvious implication is that, however much they value global prestige and the long-term economic benefits of reform, China’s leaders remain first and foremost determined to keep propping up the economic growth on which their political power ultimately depends.

As a result, unless the IMF kicks the yuan out of the reserve currency basket, and/or the United States either adds meaningful currency manipulation curbs to the TPP or, even better, acts unilaterally (don’t hold your breath), China and its leaders will be able to reap all the benefits of greater protectionism while continuing to pay none of the costs. For years, the world’s economic powers-that-be have been declaring China to be an increasingly “responsible stakeholder” in the global economy. But it actually looks more and more like they have a much bigger stake in perpetuating this delusion.

Im-Politic: Trump’s On-Target – & Detailed – China Trade Plan

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2016 election, China, currency manipulation, Democrats, Donald Trump, environmental standards, exports, forced technology transfer, Hillary Clinton, Im-Politic, imports, intellectual property theft, labor standards, Mainstream Media, Obama, offshoring, political classes, Republicans, special interests, subsidies, think tanks, TPP, Trade, Trans-Pacific Partnership, World Trade Organization, WTO, yuan

Boy, it’s hard to keep Donald Trump and his campaign for the GOP presidential nomination from dominating my posting. That’s because he remains the only presidential candidate recognizing the need to overhaul both the U.S. trade and immigration policies that have long been gutting the truly productive sectors of the American economy, and kneecapping wages and living standards for the nation’s working and middle classes.

Trump’s on-target priorities have once again been displayed in the new position paper he’s released on handling China – which is key to getting overall American trade policy right as well as getting much of U.S. national security policy right. Also evident from this paper – despite endless claims by the establishment-coddling Mainstream Media that Trump’s campaign is all sizzle and no steak, he’s once again outlined a series of impressively detailed policy positions.

And Trump’s China policies boast strong potential to put Hillary Clinton and other progressives who claim to champion American workers squarely on the spot. The Democratic presidential front-runner has said or posted nothing comparably specific on trade issues other than (for now?) opposing President Obama’s Trans-Pacific Partnership (TPP). Unless she ups this part of her game, independent voters are sure to take note.

Trump’s China plan starts off by correctly identifying the crux of America’s China problems right away. In the process, he’s sharpened his rhetoric and message. Rather than blame U.S. policy failures on simple “stupidity” on the part of American leaders, he points out that the nation’s economic approach to China has served the interests of “Wall Street insiders that want to move U.S. manufacturing and investment offshore,” not American workers. I’d have broadened that indictment to include most of the nation’s multinational manufacturing companies, but Trump valuably reminds voters that the biggest immediate obstacles to improving their economic prospects are Americans, not “foreigners.”

Trump also understands that many of China’s most harmful trade practices have nothing to do with the kinds of tariffs and quotas that for centuries dominated country’s efforts to keep domestic closed. Moreover, he focuses on the vast array of non-tariff barriers used by Beijing “to keep American companies out of China and to tilt the playing field in [its] favor.” These range from currency manipulation to rampant intellectual property theft to exports subsidies that clash with global trade law to forced technology transfer to “lax labor and environmental standards” that enable China’s “sweatshops [and] pollution havens [to steal] jobs from American workers.”

In addition, the Republican presidential hopeful gets the vital point that the damage done to the American economy by these Chinese practices can’t be ended without forcing China to face some consequences – namely, lost access to a U.S. market that China desperately needs in order to sustain growth and employment rates that can help keep its rulers in power. Trump does express some hope that such threats can lead China to “join the 21^st century.” But he also indicates that, until and unless this goal is achieved, it makes no sense to permit China “to trade with America.”

Trump’s China plan will be slammed by the offshoring-happy, China-coddling Mainstream Media – and surely by nearly all of the policy hacks staffing America’s offshorer-funded think tanks. And let’s not forget many of his fellow Republican candidates, whose campaigns are largely financed by these special interests.

But it will be especially interesting to see the reactions of Trump’s Democratic opponents and the rest of the nation’s liberal and progressive establishment. For most of Trump’s positions mirror those of the party’s mainstream – and can be found in numerous bills their legislators have introduced into Congress and voted for. Will they continue dismissing Trump a charlatan – and worse?

In fact, if Trump’s positions deserve criticism on any score, it’s that they’re too mainstream – and accordingly timid. For example, since, as Trump sees, the United States does enjoy such decisive leverage over China by dint of serving as “the world’s most important economy and consumer of goods,” there’s relatively little need for Washington to negotiate more effectively with Beijing. His positions are better presented as take-it-or-leave-it propositions, with market access turned off, or at least curbed, until strong evidence of China’s compliance is available.

Similarly, Trump is far too deferential to the World Trade Organization (WTO), whose creation spearheaded by the mercantile U.S. trade competitors and American offshoring interests precisely in order to prevent the defense of  U.S. economic interests in a timely, effective – i.e., unilateral – manner. At one point, his China paper (rightly) suggests that U.S. policy need not rely so heavily on the deliberations of “an international body.”

But he also (wrongly) suggests that Washington should continue to rely heavily on using the WTO to resolve its trade problems with China – an approach that is not only pitifully piecemeal, but that keeps an anti-American international kangaroo court in charge of most American international economic interests. If he’s serious about defending these interests – and restoring full American sovereignty – Trump needs to support establishing the United States as judge, jury, and court of appeals over all trade disputes, as well as over whatever enforcement issues arise from existing or future trade agreements.

Further, Trump appears to place excessive emphasis on China’s current currency manipulation. To be sure, there’s still strong evidence that the yuan remains substantially undervalued. It’s also not legitimately deniable that anti-currency manipulation tariffs would be an especially effective response to China’s trade predation. After all, China’s exchange-rate protectionism artificially cheapens the cost of everything produced in and traded by China. Therefore, these Chinese products (and services) receive price advantages over foreign competitors that have nothing to do with free trade or free markets. 

But it’s also undeniable that China’s currency policies have gotten much more complicated in recent months, as Beijing has needed to move to support the yuan in order to stem unprecedented capital flight. So for both political and substantive reasons, Trump would have been much better advised to treat currency manipulation as threat that is all too likely to reemerge if China’s economy keeps slowing, not as today’s leading danger. (The same of course holds for the Asian countries who have just negotiated President Obama’s Pacific Rim trade agreement.)

Yet despite these flaws, Trump’s instincts on trade policy remain much sharper than those of the rest of the nation’s media/political establishment – not least of which entails his understanding that it won’t be possible to “make America great again” unless its trade policy becomes great again, too. And his new China trade blueprint shows that he grasps enough major policy details to make that goal reality.

(What’s Left of) Our Economy: A Gathering Storm?

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Alan Greenspan, bottom line growth, bubbles, China, commodities, currency, currency wars, devaluation, emerging markets, executive compensation, Federal Reserve, Financial Crisis, free trade agreements, George W. Bush, infrastructure, interest rates, Janet Yellen, mergers and acquisitions, Obama, productivity, profits, quantitative easing, recovery, secular stagnation, stimulus, stock buybacks, stock markets, stocks, top line growth, Trade, valuations, yuan, {What's Left of) Our Economy

The wild swings of stock markets around the world today should caution anyone against reading too much into recent global financial turmoil. As should be obvious to everyone – but is so easy to forget – these stock market declines are anything but the first that have been seen, and they’re anything but the worst that have been seen. The same goes for the economic situation in China and elsewhere – which matters much more.

But although this clearly is no end-of-the-world moment or even close, the latest news is a warning that the dangerous weaknesses that plunged the world into genuinely terrifying financial crisis and then savage recession just seven years ago have only been papered over, and have begun worsening again. More seriously, the United States and the rest of the world look much less capable of resisting powerful downdrafts.

Just to review very quickly, as I see it, the last crisis resulted fundamentally not from failures to regulate Wall Street adequately, the housing bubble, or any largely financial conditions. These were simply symptoms of mounting weaknesses in America’s real economy stemming largely from disastrously shortsighted trade policies. Both major parties became so enamored with offshoring-friendly trade deals and other policies that they sent overseas a critical mass of the U.S. productive base, and therefore a critical mass of the income-earning opportunities available to middle- and working-class families.

The George W. Bush administration, the Congress, and the Federal Reserve under then-Chairman Alan Greenspan could have reversed or even slowed this trade policy approach in order to restore these crucial domestic sources of income- and wealth-creation. Instead, they decided to double down on the offshoring. But to enable consumers (who are after all voters) to preserve their living standards, they decided to create then-unprecedented amounts of easy money, which made possible substituting borrowings (typically based on the bubble-ized home prices) for inadequate paychecks. Until that bubble’s inevitable bursting, the results were widely praised as having produced an economy whose “fundamentals” were “strong.“

Once the crisis struck, the Fed and other major world central banks have sought to reestablish and preserve national and global economic momentum through yet greater money printing and thus credit-creation. National governments in the United States (during President Obama’s first year in office) and especially in China lent a big hand through stimulus programs aimed at creating new government-supported demand for goods and services, and therefore for workers.

Seven years later, the results are in, and it’s fair to say that they have produced growth and employment levels that keep lagging historical standards not only in the United States, but everywhere. In fact, largely because the Fed so quickly and energetically capitalized on its massive credit-creation powers, America is a conspicuous out-performer. But as I’ve also pointed out, the makeup of the U.S. economy still strongly resembles that of the housing- and consumption-heavy bubble decade, which is why a more compelling description of America’s situation is not “ho-hum recovery” but “secular stagnation.” This concept, popularized by former Clinton-era Treasury Secretary and Obama chief economic adviser Larry Summers, holds that the nation has lost so much productive oomph that it’s forced to rely on Fed-created bubbles for whatever growth it can muster – and thus to run the ongoing risks of bubble-bursting as well.

Something, though, has clearly changed in recent weeks. The one-word description is “China” but the real answer is of course much more complicated, and looks to be a function of a seemingly fatal flaw of global easy-money policies: They’ve fostered way too little productive, growth-boosting investment, and way too much mal-investment. The latter has barely kept growth in positive territory but that’s gifted Wall Street and executives at big publicly traded companies with huge windfalls thanks to a (so far) mutually reinforcing cycle of share buybacks and rising stock prices that has supercharged their largely stock price-based pay. Other uses for cash and credit that have seemed more tempting than servicing economically fragile and in many cases still-cautious American consumers included buying up other companies and, mainly for Wall Street, simply parking the money at the Fed, where big finance firms could earn a bit of interest on trillions of dollars for doing absolutely nothing.

But still other distorted investment choices have included so-called emerging markets. In those lower income countries, higher levels of risk brought attractive levels of return, but investors (and not just financiers) were also impressed with relatively high growth rates. And that’s where much of the latest round of troubles is rooted.

Several big and chronic weaknesses and vulnerabilities of these countries – including China – were largely overlooked. First, because incomes were comparatively low, these countries were never able to grow mainly by turning out goods and services for their own populations. Growing fast enough to spur significant economic progress required finding markets “where the money is,” which meant abroad generally and disproportionately in the United States. When growth in the United States merely kept slogging along, many of the new factories that were built with American consumers in mind began looking awfully risky.

Just as bad, many of these emerging market countries themselves got greedy. Their governments and central banks took advantage of low global interest rates by trying to juice extra growth and rising incomes by offering easy credit to their consumers, home-builders, and other businesses, too. But they weren’t able to borrow sufficiently in their own currencies, and many jumped at the chance to take on abundant dollar-denominated debt – including companies that could borrow on their own, without working directly through their governments. Moreover, many of these low-income countries (and some wealthy counterparts, like Australia and Canada) had gotten an added boost from China’s seemingly endless demand for their raw materials, which produced the lion’s share of their growth. But they failed to use earnings from the resulting high commodity prices to diversify their economies and take at least a few eggs out of that basket.

Lately, both China and the Federal Reserve have hit the emerging world with several punishing whammies. China itself continued to depend heavily on exports for its growth, and therefore started slowing itself as global demand continued disappointing. Its performance was additionally undermined by a decision to let permit the yuan to strengthen, in order to win it reserve currency status and greater long-term economic independence.

Beijing had also been trying to subsidize more growth led by domestic demand. But as with other third world countries, because Chinese incomes remain so low even after impressive pay raises, massive amounts of stimulus ranging from infrastructure and housing investment to (most recently) stock market manipulation did more to saddle that country with immense debts than to keep growth and job-creation at levels that were both economically acceptable, and politically essential – i.e., strong enough to keep the masses reasonably happy.

If official data is close to accurate (hardly a certainty), China’s growth rate is still world-class. But even its recent decline from previous blistering levels clearly has been enough to ravage global demand for fuels, industrial metals, and foodstuffs alike – and in turn the economic prospects of the commodity producers. Since the economic prospects of these erstwhile johnny-one-note high-riders began worsening so markedly, foreign investors began pulling money out, putting downward pressure on their currencies, and consequently on their ability to import – including from the United States. At the same time, China’s own recent yuan devaluation deepened this predicament – by further diminishing the PRC’s own purchasing power, and by reducing the price competitiveness of all the finished goods that the commodity producers and their more manufacturing-oriented third world counterparts needed to sell.

If anything, the Fed’s impact on the developing world has been still more destructive. Like the United States, much and even most of its recent growth has depended on artificially cheap credit. But unlike the United States, it can’t borrow in its own currencies. As a result, these countries are exposed to exchange-rate risk (created mainly by the rising dollar) as well as to interest rate risk (which can be created not only by the actual Fed interest rate hike that Chairman Janet Yellen and colleagues have been promising, but by a perception of impending hikes that reduces the third world’s creditworthiness and thus their access to affordable new money.

The real U.S. economy is more than capable of staying relatively unscathed by this global turmoil. For despite the best efforts of American leaders, it’s still less reliant on trade, foreign investment, and the well-being of the rest of the world than practically any other economy. U.S. stock markets, by contrast, could be in for greater trouble, which could be the single most important reason for their recent drop (keeping in mind that their levels are always determined by a great variety of long and short-term influences).

The reason? Among the major props for stocks during the current feeble U.S. recovery has been American companies’ remarkable ability to grow profits despite the real economy’s woes. As widely noted, much of this growth has been on the bottom line – resulting from greater efficiencies rather than better revenues. Human ingenuity’s power should never be underestimated, but by the same token, it’s hard to believe that infinite amounts of blood can be drawn from that stone. Indeed, faltering recent American productivity performance strongly indicates that diminishing returns are in store for these efforts. Emerging markets, with their historically high growth rates and gargantuan populations, have long been viewed as business’ best future hope for accelerated top line growth, and so far they’ve performed well enough to justify considerable confidence.

This latest set of emerging market troubles, including China’s, signals that this ace in the hole really isn’t – which understandably raises questions about whether current stock valuations can be sustained. As usual, please take all forecasting efforts, including mine, with a big boulder of salt. But it seems to me at least conceivable that, just as Wall Street has for years comforted itself by observing that “the stock market is not the economy,” unless Washington screws up royally, Main Street will start becoming grateful for this divide.

But that doesn’t mean that a healthy speed up in the recovery is in sight. Speculation has abounded lately that the Fed might not only postpone those interest rate hikes but need to launch another round of bond-buying – i.e. “quantitative easing.” Yet why a new influx of easy money would generate more sustainable growth than its predecessors isn’t at all apparent.  Washington could return to greatly increased deficit spending, but with so much of U.S. consumer and business demand being satisfied by imports, and with foreign currency devaluations likely to continue, the growth and employment benefits seem more certain than ever to leak overseas.  In principle, this new spending could be targeted on domestic infrastructure, but however popular this idea has been in Washington, it hasn’t yet been popular enough to produce enacted programs, and the intensifying presidential cycle could well turn into a new obstacle.

What about tariffs on imports, which could spur growth by cutting the trade deficit – and without budget-busting tax cuts or stimulus programs? As usual, they’re completely off the table. Indeed, new trade agreements, and therefore higher deficits and even slower growth, appear to be next on that front – though perhaps not until both Democrats and Republicans are safely past the next election.

That leaves fostering an unhealthy speed up in the recovery – kicking the can down the road yet again secular stagnation-style, for the usual unspecified reasons expecting meaningfully different results, and acting surprised when crisis clouds begin gathering anew.